— A series of new all-time index highs but no popping of corks
— A flight to safety goes on under the surface–a 1.25% yield on the 10-year Treasury July 7, couple with a ‘risk off’ 7% drop in the Russell 2K since July 1
— Are we headed for an economic slow-down or recession? This question makes for riveting television and media speculation. Does it make sense?
New all-time highs met with fear and trepidation
There appeared to be no “joy in Mudville” at this week’s close with the market striking out on three bad pitches– a Covid Delta curveball, a high, hard one from inflation and an illusive slider from a flattening yield curve. Friday’s market saw the S&P 500, Dow and Nasdaq get brushed back from all-time record high on Monday. Interestingly, this was after several weeks where the market had returned to the Covid lockdown playbook, buying large-cap growth (one decision stocks — like the nifty 50 of the 1970s) and selling value (economically sensitive) and small-cap (even riskier in a declining economy). On a positive note it is very encouraging to see this level of negativity with the market at new highs. Generally speaking secular bull markets end in euphoria. Obviously bricks are continued to be laid in the ‘wall of worry.’ Let’s examine the bad pitches or bricks, whichever you prefer.
The Covid Delta Curveball
Since the advent of Covid 19 we have had three new variants emerge, all causing angst fed by the media. On the one hand I think that this may have been a responsible course of action on media’s part. They certainly did not want to downplay the seriousness of the threat … people should get vaccinated! By the same token there is an obligation for them to give factual information. As we are all aware that Covid Delta is a more highly contagious version of the disease, it is important that they provide perspective on lethality and hospitalizations from the virus. The Wall Street Journal gave us perspective in an editorial published July 16 (You will need a subscription to download). Here are few pertinent excerpts:
— ““A new study from the U.K. found that vaccines are still incredibly effective at preventing serious illness with the Delta variant circulating. The Pfizer vaccine was 96% effective after two doses at preventing hospitalization, meaning the average unvaccinated person in the study was more than 25 times as likely to be hospitalized with Covid as the average vaccinated one.” According to the article the J&J vaccine also produces very strong resistance to the Delta variant as much as eight months after administration.”
— “99% of hospital admissions are with people who have not been vaccinated.”
— “In the U.S. overall, hospitalizations fell consistently from their daily peak in early January of 133,214 to an average of about 12,000 in late June and early July. In the past few weeks, however, hospitalizations bottomed out and are rising in places with low rates of vaccination and low levels of natural immunity. Hospitalizations in children have been consistently low since the first domestic Covid-19 case was found in February 2020, and they haven’t increased since Delta emerged.”
–““In baseball you don’t know nothing,” Yogi Berra observed. But we need to stop acting as if we know nothing about Covid-19. Every variant that has come along has produced unwarranted panic.”
As per usual, it would seem to me, based on the selling of economically sensitive assets and the purchase of UST 10-years at a 1.30 yield, there are people out there who think that delta is about to close or slow down our economy. I don’t see that as a high probability event.
The high, hard one from inflation
Inflation numbers continue to run hot in the United States. This is to be expected as a result of shortages created by the economic closures last year. I will go further to say that we should expect higher core rates of inflation coming out of the initial spike from the reopening. We should also expect higher interest rates moving forward (unless the current 1.30% treasury presages a deep recession or depression, which seems unlikely). The emergencies of 2009 and 2020 are over. Current interest rate levels reflect an emergency that does not exist. I have said many times that higher inflation (not runaway inflation) will benefit stocks. Many media and pundit statements to the contrary seem to me hyperbolic, misinformed and irresponsible. Of course, moves in rates and inflation will be a cause of some transitory market weakness. Most market participants have been conditioned to react this way. It will not be the end of the world. This is a bear’s red herring. Take it from someone who took out a 9%, 30-year mortgage in 1975 (DJIA –802=avg. closing price).
The Flattening Yield Curve–An Illusive Slider
An inversion of the yield curve (the spread between the 2-yr. and 10-yr. Treasury yields going negative) is viewed as a bad omen. A sudden and sharp flattening of the curve has people worried, especially as the Fed would be expected to react to inflation and an overheating economy by raising short rates. Despite Fed protestations to the contrary (they claim this would be a late 2022/2023 event) a sharp drop in that spread (about 35% since March) has certain bearish commentators chirping. Bottom Line–their chirping and the flight to safety it supports is a big reason for that narrowing spreads. It is due to fear rather than economic weakness or a change in Fed policy (which I said is on an emergency footing, not supported by an emergency).
Are we headed for recession?
The reason I bring up this question is that someone who knows my background posed it to me the other day. My answer should be “eventually yes … it is inevitable.” Frankly, I wondered under the current circumstances, what world or economy that the person posing the question was living in. My actual answer was that I did not think so and that I could give her 5 trillion reasons why (on top of a very easy monetary policy) that would be pretty unlikely at this time. More importantly I think this question is endemic of an underlying distrust of the market and economy that has been with us ever since the great recession. This adds to my conviction that this secular bull market has much further to run.
“Great bull markets end in euphoria.” (Sir John Templeton)
What do you think?