Week Ending November 27th, 2020

Most of the benchmark indices reached new highs last week. Dow Jones industrial Average got the most attention as it reached psychological level of 30000 last week. I think investors were confident due to the growing vaccine optimism and diminishing political uncertainty. It seems almost certain that Biden will take over the power in January and it will be a smooth transition.

Moreover news about possible nomination of Janet Yellen as new Treasury Secretary was very good news for the market participants as we all know about the dovish nature of the Ex Fed chair. I think Janet Yellen is a good choice as she can work closely with the Federal Reserve.

Last week was a short week due to Thanksgiving but the volumes remained high. The jobless claims jumped higher  to 778000 in the week ending November 21. Also the November reading of University of Michigan's sentiment gauge was revised lower to 76.9, the lowest number since August this year.

Despite warnings, millions of Americans took to roads and skies to travel for Thanksgiving and the daily new cases continue to rise and hit new records.

Week Ending November 20th

Major stock indices ended mixed last week . The optimistic and highly awaited news about vaccines was overshadowed by the worsening pandemic crises and lack of any progress on the fiscal stimulus. Also the weekly jobless claims increased last week to 742000 more than expected by the economists .With the new  lockdowns, the jobless claims are expected to rise further.

Volatility in the stocks is also expected to rise in coming weeks as Trump is not ready to concede. I think one should remain vigilant about the possibility of correction happening in the stocks  in mid-December to end of January period.

I know things are much clear after the election and third quarter results have been better than expected overall . And there is lot of cash available on the sidelines to be deployed. But the labor market is not close to where it was before pandemic. Economy needs and depends on fiscal stimulus and interest rates are at the lower bound. Path of the pandemic is not clear and lot of questions about the vaccines need to be answered. Long term effects of pandemic on the economy and labor force are not clear. Also stocks look very costly by looking at absolute valuations.

Stock market can rise further before it corrects early next year. And I don’t think the traders would take extra risk in the remaining days of the year. I also think Biden is not going to reverse tariffs imposed on China. Biden is going to put pressure on China by taking international allies along. So tariff wars will continue in near future.

Although I am worried about the insane valuations of the tech/growth sector but I am also not in favor of jumping 'all in' into the cyclical stocks. I think economy is not in a state it was before pandemic and one needs to wait till early next year to consider cyclicals.

Week Ending November 13th, 2020

All of the major benchmarks went sharply higher on Monday but surrendered much of the gains at mid week before rebounding on Friday. The sharp move up was fueled by Biden's win declared by media and Pfizer vaccine results early last week. I think more than 90% efficacy rate of Pfizer vaccine, as found in the preliminary data shared by Pfizer, was turning point for the market sentiment.

Due to vaccine news, investors sold tech stocks which benefitted from stay at home scenario in particular and  lifted cyclical stocks. Bank shares also benefitted due to rising long term yields. On Thursday investors became cautious due to rising new cases and possible lockdowns in the coming weeks. I think path of the new wave is going to test investor's nerves again.

I think vaccine is very good news but investors should not forget about at least 5-6 months delay before vaccine reaches the masses. Moreover it has to be seen how long vaccine is going to help one stay safe.

Initial jobless claims fell further last week to 709,000. This signals the continued healing of the labor market which is one of the main drivers of sustained economic growth. The rising new cases may decrease the hiring in coming winter months but overall we are on the right track. Consumer price data released last week showed that core inflation dropped back a bit last month with price rising at subdued 1.6%. Slower demand for services was main reason behind modest reading.

I urge investors not to believe the possible outperformance of value stocks over growth stocks based on one week's trading. Let's wait and see if this trend continues.

Week Ending November 6th, 2020

It was a good week for stocks. Stocks kept on moving higher despite political uncertainty. I think stocks were up as investors thought last week that even if Biden wins, GOP is going to retain control of the Senate. Last week investors thought  Biden administration won’t be able to reverse the tax cuts made by Trump. Moreover it seemed difficult for the Biden administration to keep most of the extreme left leaning promises made to public. Moreover the investors felt that there won’t be strict regulation for businesses and big banks as they thought GOP will retain control of the senate.

Biden claimed victory on Saturday although Mr. Trump has not conceded his defeat yet and threatened to file more law suits this Monday. I think these lawsuits represents noise and it is nearly impossible for Trump campaign to prove any wrongdoings in the election. But I think this investigation will go on for quite some time. Some of the senior members of the Republican Party are trying to endorse Trump's efforts for recount and find if there was any wrongdoing. I think it’s just a ploy of the Republican Party to please Trump’s base.

I am more concerned about the stimulus bill which is highly needed to jumpstart the economy. I think the path for stimulus bill is not straight but I feel some kind of bill will be ready before the year end. As anticipated federal reserve did not change any plan after its meeting last week. The data released last week was positive for the economy, the unemployment level reached 6.9% as economy added 638,000 jobs in October. Initial jobless claims fell by 7000 in the last week of October to reach 751,000. The path of the pandemic is also on top of investors minds. The daily new cases have been on the rise. It has to be seen if there is going to be any lockdown in US states .

On the trade front I don’t think China is going to change its stance after Biden becoming the president. Neither US is going to change its demands under Biden.  The uncertainty around trade negotiations is certainly going to decrease under Biden. I think Biden administration would be much tougher on human rights violations in China. Prince of Saudi  Arabia will have to find new friends in the Biden administration to continue to pursue his dreams. It has to be seen what happens to US policy towards  Middle East and war in Yemen.

I urge investors not to let the guard down yet and be vigilant as we are still in the uncharted territory.

Week Ending October 30th, 2020

Last week was very volatile, as number of new coronavirus cases hit new record highs, and probability of any fiscal stimulus happening before election went to near zero. SP500 fell almost 6% last week and volatility jumped by 40% approximately. Technology sector also went down although it acted as the defensive sector since virus outbreak. I think the  election outcome worries are at the core of all the volatility and path of coronavirus is the shell.

Markets tumbled last week as investors were hoping for 

1. Less probability of second wave happening.

2. Second wave was supposed to be less lethal by market.   

3. Perception of uncontested election.

And these pre conceptions were re calibrated last week which caused the meltdown. 

States are running out of funds as the revenues have taken the hit due to covid and federal fiscal stimulus is desperately needed. Chances of big stimulus bills next year depend upon the probability of blue wave happening. I don’t think we should hope for immediate stimulus bill after the election if Trump loses the election although another round of negotiations will start after election day.

On the positive side US GDP increased at annual rate of 33.1% in the third quarter according to advanced estimate by Bureau of Economic Analysis released last Thursday. New jobless claims fell further last week to 751,000.

The economy seems to be  recovering from the shock of the first wave at a steady pace. I think we need not to worry about the negative effects of second wave as we are better prepared now as a nation and some of the medications and procedures seem to work.

Let's hope for an uncontested election otherwise uncertainty will roil the markets for next 2 months till the inauguration day.

Whoever wins the election, we should stay united.  God Bless America!

Week Ending October 23rd, 2020

The major indices ended mixed last     week as investors were waiting for news about stimulus bill negotiations and earnings. I feel that two parties are still far apart from each other on the stimulus bill. Last week was also marked by antitrust lawsuit filed by the US government against Google, Facebook and Apple.  I think this is not a comprehensive lawsuit as it deals with Google’s consumer side of the business only and DOJ needs to prove in the court that Google actually violates antitrust law; which is lengthy and difficult process. Moreover, it takes only few steps to change search engine in phones nowadays. The data released last week was better than expected as the new jobless claims were 787,000. Existing home sales were also better than expected.

Looking at 10-year treasury rate, it appears that market is signaling Biden win as many believe that he will bring bigger stimulus bills and a massive infrastructure bill which will boost GDP. But I believe that even if Trump wins, fiscal push will be far bigger. Biden is a far better seasoned politician than Trump and I don't think we should take his promises so seriously.  Moreover, fate of all promises also depends on the composition of the next congress.  I feel that markets are not reflecting the reversal of the all tax cuts even if we believe that market is signaling Biden win.

Markets have performed well under both parties and although elections effect its course for the very short run every 4 years. But in the long run, market’s direction is determined by fundamentals only. World is recovering from shock of this pandemic, so eventually all economies will recover helped by accommodative policies of central banks and fiscal measures taken by governments. 

Many strategists are saying not to worry this time as they are not expecting huge downward moves around election. The fear index is also not showing any panic signs at the moment. But history shows unexpected things occur mostly when they are expected the least.

I have been advising investors not to panic, but be prepared in case we have a contested election or any other scenario other than binary outcome.

Week Ending October 16th, 2020

The major stock indices were flat. Last week’s economic data releases were mixed. Core retail sales rose 1.4% in September, after 0.3% drop in August. Weekly jobless claims rose to 898,000 which is a little  disappointing.

It has to be seen whether Trump accepts his defeat after counting the mail in ballots or he declares his win on November 3rd after counting voting in person votes only. It is clear that Trump’s fan base would be voting in person in much higher numbers than Biden’s supporters. So it's possible that Trump would have a big lead over Biden by the end of November 3rd counting of votes.

What if he decides to stop counting of votes after 3rd of November, it would cause a legal dilemma. What if Biden wins by a thin margin of let’s say 1000 votes in key states, Trump would most probably going to cast doubt on the legality of such few thousand votes.

I think as an investor, I am really worried about what happens between November 3rd and Jan 6th (when electoral votes are counted). Moreover there are pretty good chances of civil unrest which may become violent irrespective of whether Biden or Trump wins.

Although the above mentioned scenarios are hypothetical ones, but I think one should be prepared mentally before any of the above becomes a reality. One critical factor which determines the probability of any confusion happening is how many Americans cast votes early enough. I call upon my fellow Americans to cast their vote as early as they can. As Tom Stoppard said “It’s not the voting that’s democracy; it’s the counting”. I am confident that America will come out more stronger after this election.

China’s ambitious expansion plans need to be understood by the developed world. Moreover the human rights violations put China as a barbarian autocratic nation on the world map. I hope democratic governments are taking China seriously, I think China is going to be the biggest threat to the world order and commerce in next decade. The ultimate goal of the world leaders should be to set up democratically elected government in China in the next decade.

Week Ending October 9th, 2020

It was another good week for stocks. Stocks kept on moving higher on hopes of new stimulus bill, hopes of early approval of some antibody therapies. Although stocks pulled back later on Tuesday after President Trump’s tweet about calling an end to negotiations. But Mr. Trump reversed his stance later in the evening on Tuesday resulting in continuation of stocks’ rally on Wednesday. The gap between two parties’ proposed stimulus bills has narrowed very much to half a trillion approximately by the end of Friday. 

I think markets are factoring in greater probability of Biden as next President and may be hoping for even bigger stimulus bills in the near future, which is highly expected. Moreover investors are thinking that democrats will support the Fed's accommodative policy more. Over all the economic recovery is slowing down and one should not base his/her guess solely on the bigger stimulus package hopes and Democratic win. 

Labor Participation rate has been dropping since many many years. Although it has spiked a tiny bit from April 2020 low. There are many factors responsible for this but for the US economy to thrive again we have to solve structural problem associated with labor. I think we need to encourage the sidelined workers to join work force again by starting apprenticeship programs which will deliver new skills to workforce whose jobs are thought to be eliminated by technology. The government should work with corporations to draft such programs. 

Monetary policy won’t be enough to stimulate economy until it is substantiated by big fiscal push. Fiscal push holds the key now, which depends upon next congress and next President. Fiscal policy holds the answers for future inflation to a great extent. 

I ask investors to arm themselves with tools to jump over the near term hurdles such as expected volatility due to election and mid term hurdles such as change in tax structure if democrats win and next administration’s view on big tech’s monopolistic practices. Although I am sure Democrats won’t do anything big on tech if elected to the highest office. 

I want the investors not to forget chances of Trump being re-elected, although polls show Biden as the leading candidate. Polls were not expecting Trump’s victory in 2016. The re election of Trump would be a surprise to market positioning. Please take note of this and be prepared. If Trump is elected again, I feel he will be more strict on China and globalization. Moreover infrastructure revamp would be his top agenda which he has missed in the first term. I think he is the only leader to challenge world order and international institutions.

Week Ending October 2nd, 2020

Mr. Trump’s positive test result added more to the uncertainty on last Friday. I think investors need not to panic and should stay invested. They need not to change their allocations in their investment portfolios right now. I have been warning about rise in volatility around election for the last few weeks based on historical pattern. Although volatility will tend to come down after 1-2 weeks of the election. Therefore a tactical move to buy protective put option would have been great, I think its still time to buy one now. Moreover I want to add that the bonds won’t be enough to safeguard against any meltdown which may happen after elections as many are hoping for.

Value stocks have been underperforming for the last many years now, as most of gains in the widely followed index are due to a small group of big tech stocks. I am not saying that these tech companies are not good, but their valuations looks super stretched. Although I don't recommend investors to get rid of these big tech names, as these companies are mature enough, diversified enough and very cash rich.I just want people to be vigilant enough about any systemic correction and arm themselves with protective gear. The protection may seem to be costly to many, but there is no alternative as no one knows how long this market rally will continue. I only mean to say that core of any equity portfolio should be strong and consists good value stocks. The value stocks are not immune to systemic shock, but historically they will not go down as much tech stocks would.

The value investors are dreaming about return of an era of value stocks, but I think they should understand the changing demographics, importance of tech in daily lives of millennials, cash rich strong balance sheets of big tech companies before making their case based on historical data.

Unemployment level went to 7.9% after last Friday’s jobs report as participation rate went further down. Economy continues to recover but slowly even though new cases of coronavirus are being reported from NY and other states.

As of Sunday evening, Trump is feeling well, and hopefully will be out of the hospital early this week. Although there are lot many questions remain to be answered about his health.

Week Ending 25th September, 2020

Only Nasdaq’s weekly return was positive last week. As renewed coronavirus worries continue to emerge from Europe. Moreover investors ‘consensus estimates predict arrival of successful vaccine by mid 2021. The weekly initial claims slipped down showing a reading of 870,000(week ending September 19th), just 4000 more from previous week’s revised reading.

The stimulus hopes dimmed last week as new partisan fight erupted over SCOTUS nomination after passing of Supreme Court Justice Ginsburg. This new fight over SCOTUS nomination will distract the ongoing negotiations on fiscal relief package in my view.

As monetary policy has reached the limits, fiscal push is much needed to bridge income and employment gap until we have some solution to this pandemic. I think much larger fiscal push is needed to revive the economy. It is the right time for the US to start mega infrastructure plan as interest rates are near zero. Although it has to be seen what will be the multiplier effect of such infrastructure plan, but I think it will boost the growth rate and employment to a great extent.

Despite the recent pullback the tech is still highly overvalued looking at the absolute valuations. I think this bubble can be burst by only a more negative news on vaccine front, geopolitical tension or fed’s mistake. In the last tech bubble of 2000, Fed was raising rates which caused the bubble to burst. This time fed is highly accommodative and does not want to raise rates till 2023 as per latest action plan from Fed. Moreover the tech companies of 2020 are much more bigger, cash rich  and mature than the tech we had in 2000. The mega tech  stocks are the only way for investors to have some kind of real return. Although I am very much worried about excessive valuations of tech, I don't think, tech is going to fall easily this time. Every time tech shares fall, investors rush to buy the dip as these stock represent the growth and shelter.