Insights

YEAR-END THOUGHTS, PART 1

As we fast approach year’s end, the daily rhythm of our lives seems hijacked by an ever growing checklist– charitable giving decisions, gathering ingredients for that “one” holiday recipe from childhood, and posting holiday greetings, just to name a few.

Yet, more so than years past, one’s particularly drawn to take careful stock of 2020, even as we all eagerly await 2021.  It is in this spirit of introspection that I share the poignant implications of the death of Tony Hsieh, the Taiwanese American founder/ex-CEO of Zappos.  According to one report, Hsieh, who passed recently at age 46, left behind an estate of $800MM without a will, thus forcing his family to sort out the entangled legal web.

Undoubtedly, Hsieh’s example is an extreme one.  

It is, however, no less useful in illustrating the importance of estate planning documents in any financial planning, before you contemplate any other aspects of your financial life.  Even if you’re way ahead on this curve, dust off those documents to ensure they remain valid in reflecting your current wishes.  If nothing else, 2020 should have taught each of us “black swan” events are perhaps not as exotic as one may have thought.

WuRevue Week Ending 12/04/2020

Top News:

11/30: China’s economic rebound continued unabated in November, even as the US seeks to further sanction Chinese state-affiliated enterprises. In a first, Moderna applied for both US/EU’s emergency approval of its vaccine. The window to conclude Brexit negotiations is narrowing, with fishery rights viewed as a key stumbling block.

12/01: US manufacturing accelerated again in November, albeit at a slower pace than the prior month. A bipartisan group of lawmakers unveiled a $908 billion coronavirus relief bill aimed at breaking congressional impasse.  OECD now expects global GDP growth to reflate to its pre-pandemic level by the end of 2021 in a China-led recovery.

12/02: UK became the first to authorize emergency use of the vaccine developed jointly by Pfizer and BioNTech.  Biden said he “would not make any immediate moves” to disrupt existing tariffs on or trade deals with China.  Meanwhile, a law to delist non-compliant Chinese companies from US exchanges is expected to be signed.  Democrats appeared open to negotiate on a smaller economic recovery bill.

12/03: Optimism from the latest weekly jobless claims data was muzzled as the US surpassed more grim pandemic milestones.  One gauge of the all-important US service sector suggested decelerating growth in November.  The Street was dismayed as Pfizer disclosed its vaccine shipment for this year will be halved due to supply chain issues.

12/04:  Coming in below expectations, hiring in the US fell to a seven-month low as pressure mounts for Congress to accelerate revived stimulus talks.  Moderna said its vaccine may confer longer-term level of protection for at least 3 months.

Heard on the Street:

“So while the equity market may continue on its course of confidence that a soon-to-be-released COVID-19 vaccine will allow global economies to reopen in earnest in 2021, history hints that December’s return may be subpar as stocks catch their breath from their recent post-election sprint.”

— Sam Stovall, chief investment strategist at CFRA, quoted by MarketWatch on 11/30/2020

“I think emerging markets are very under owned… We’re actually neutral on China right now, but we’ve upgraded the rest of emerging markets where we do think the valuations are attractive, and there’s more opportunity.”

— Joyce Chang, chair of global research at JP Morgan, in a CNBC interview on 12/3/2020

Longer Game:

Noting that “the level of interest rates is an increasingly important element to consider when valuing equities,” Robert Shiller believes current market levels may not be as “absurd” as some thought, due to “a potentially protracted period of low interest rates.”

Prof. Minxin Pei outlined a roadmap to de-escalating Sino-American tensions.  Such a move is in both countries’ “short-term political interest,” even if longer-term unipolar rivalry appears unavoidable.

Bonus:

While Chairman Powell warned of the disproportionate economic impact on the least wealthy fifth of the country, Congress continued to dither on a new round of fiscal support.  One policy think tank posits the extension and reinstatement of unemployment benefits through 2021 would add 3.5% to GDP and create 5.1 million jobs.

WuRevue Week Ending 11/27/2020

Top News:

11/23: Compared to two US predecessors with similar efficacy results, a UK-pioneered late stage vaccine reported promising results, with more accommodative storage requirements.  Moreover, the FDA authorized a new antibody cocktail as another arrow in the Covid battle quiver.  Market optimism was further sustained as word leaked that Janet Yellen, the former Fed chair, will be Biden’s pick for the Treasury.

11/24: Stock indices received a boost after a major political overhang was lifted as the Biden transition is proceeding officially with support from federal resources.  Recent vaccine euphoria notwithstanding, November’s consumer confidence deflated to a three-month low after resurgent infections weighed on economic outlook.

11/25: October’s consumer spending & income report (here) and the latest weekly jobless claims tally (here) confirmed near-term challenges remained for Main Street, even as Wall Street zoomed to new heights.  Additionally, growth in durable goods orders in October decelerated, after a historic expansion in the third quarter.  Against this backdrop of an uneven recovery, minutes from the Federal Reserve’s meeting in November showed its continuing willingness to intervene, as needed.

11/27: Investors were undeterred by the extension of restrictive pandemic measures in two key European nations (here, here), and questions being raised regarding the efficacy data of one recent vaccine candidate (here).

Heard on the Street:

“Overall, the push and pull between tech stocks and cyclicals will likely continue through the next couple of weeks, and we could see some tough days as economic data is released that reflects the deterioration in consumer spending we are currently experiencing.”

— Shannon Saccocia, CIO at Boston Private, quoted by CNBC on 11/23/2020

“As financial markets celebrate the coming vaccine-led boom, the confluence of epidemiological and political aftershocks has pushed us back into a quagmire of heightened economic vulnerability. In Dickensian terms, to reach a “spring of hope,” we first must endure a “winter of despair.”

— Stephen Roach, former Chairman of Morgan Stanley Asia, in an op-ed on 11/24/2020

Longer Game:

What are some longer-term secular changes wrought by the pandemic?  According to David Rosenberg, enduring themes include: fundamental shift towards “stay-at-home and work-at-home,” post-pandemic new normal household savings rate of nearly 10%, and China’s capturing of a larger share of global GDP.

PIMCO, one the world’s largest asset managers, highlighted four key implications from China’s latest five-year plan: 1) lower annual GDP growth of 4.4% ; 2) stronger local currency owing to further market reforms; 3) intensive R&D investments to achieve self-sufficiency in technology; and 4) higher environmental protection standards.

Bonus:

With the spate of promising vaccines coming online, the inevitable focus has now shifted to when “herd immunity” may be reached.  Citi Research expects the critical threshold to be reached in late-2021, with developed economies first to experience economic benefits, given their vaccine pre-orders.

WuRevue Week Ending 11/20/2020

Top News:

11/16: Looking past a stalled presidential transition and the uncontrolled Covid outbreak, investors focused instead on encouraging developments in a second late-stage US vaccine and China’s continuing recovery story.  Also of note, in stark contrast to de-globalization trends elsewhere, 15 nations in the Asia Pacific (including China, Japan and Australia) signed a new free trade framework.  Known as RCEP, it comprises 30% of the world’s GDP and population.

11/17: Softer US October retail sales, owing to pullbacks in discretionary items, were mitigated by evidence of sustained recovery in industrial production and positive sentiment in the homebuilding industry.  

11/18: Pfizer and BioNTech announced that they will be seeking emergency review by the FDA within days, seeing as numerous US states and cities are re-imposing restrictive measures to slow coronavirus infections.

11/19: The latest new weekly jobless claims ticked up for the first time in a month, while it has remained stubbornly above 1 million since the pandemic’s outset. Senate negotiations over additional stimulus will reportedly resume, the resolution of which cannot come sooner for 12 million Americans facing the daunting prospect of losing their unemployment benefits by year-end.  The housing market remained a bright spot: October’s existing-home sales saw a sequential increase of 4.3%.  EU’s efforts at passing another relief bill was stymied by two member states.

11/20: In a decision viewed as both cynical and political, Mnuchin will end select lending facilities targeted at small- and medium-sized businesses, a move vehemently opposed by the Fed.

Heard on the Street:

“We see Fed COVID-19 policy responses as driven by a view that if the FOMC [Federal Open Market Committee] sees a high probability of a move at the next meeting, it moves immediately, not delaying needed policy moves because of an arbitrary FOMC calendar. In our view, it may make such a calculation in coming weeks, with COVID-19 intensifying and fiscal stimulus caught in the Bermuda triangle of a partisan, lame duck Congress,”

— Steven Englander, macro strategist at Standard Chartered, quoted by MarketWatch on 11/16/2020

“Mnuchin’s move will tighten financial conditions and removes a safety net for markets at the wrong moment.  One side effect is that it increases the likelihood that the FOMC will strengthen QE [Quantitative Easing] in December… However, QE is a very imperfect substitute for a credit market backstop.”

— Krishna Guha and Ernie Tedeschi, analysts at Evercore ISI, highlighted by MarketWatch on 11/20/2020

Longer Game:

Can Biden renew the American-led post-1945 liberal world order?  For one observer, that’s unlikely because the “post-Trump order appears to be more about a return to the inter-bloc competition” between democracies and authoritarian regimes.

Bonus:

According to Bank of America’s latest monthly survey of institutional investors, 91% said the economy will be stronger in the next 12 months.  Reflecting such optimism, investors have been rotating into more speculative and hardest-hit segments of the market, including small-cap and emerging market stocks.

Top News:

11/09: Investors pushed equity markets, notably non-tech issues, higher, following added clarity on a Biden victory and encouraging efficacy data from one leading vaccine candidate.  China’s exports, which rose 11.4% in October, may face headwinds, in light of fresh European lockdowns.

11/10: Vaccine-driven optimism was sustained when the FDA approved an antibody treatment for emergency use for the first time.  Meanwhile, unemployment figures in the U.K. (here) and France (here) rose as Europe’s Covid-induced jobs crisis deepened. 

11/11: Despite earlier warnings by experts, every state in the U.S. saw record increases in new coronavirus cases over the past week, with overall hospitalizations reaching the highest point of the pandemic. Constrained economic activities and weakening consumption prompted OPEC to cut its daily global oil demand forecast in 2020 by 10% below last year’s level.

11/12: Another week of slow but mostly steady improvement in the weekly jobless claims picture did nothing to bridge the entrenched partisan divide over the size of long-awaited fiscal relief by Congress.  Slack in the U.S. economy was evident in October as core inflation ticked lower to an annual rate of 1.6%.  On the pandemic front, a second mRNA late stage vaccine candidate reached a key milestone, while an advisor to President-elect Biden floated the idea of a nationwide lockdown after the country registered record case numbers six times in just eight days.

11/13: Preliminary consumer sentiment fell in the first half of November, dragged down by elections jitters and another wall of Covid-related worries.  However, investors took comfort in October’s Producer Price Index report as a sixth straight month of uptick allayed nagging fears of deflation.  In a move likely symbolic, the Administration banned Americans from investing in Chinese companies deemed to support China’s military. 

Heard on the Street:

“Now, along with the market’s sharp rise, investor expectations have also risen… on a net-basis, we expect the market to trade in a choppy fashion near-term and the strong gains to moderate… For those investors working excess cash into the market, we would continue to average in but look to be more aggressive on pullbacks.”

— Keith Lerner, chief market strategist at SunTrust Advisory Services, quoted by MarketWatch on 11/13/2020

“Indeed, we think that the US unemployment rate could fall quickly enough to warrant a rate hike from the Fed in 2023… Our call does rest on a vaccine being widely available by mid-2021, and another round of stimulus no later than Q1. But assuming we get both, there should be some better-than-expected news for the US…if we look past a gloomy winter.”

— Avery Shenfeld, chief economist of CIBC World Markets, highlighted by MarketWatch on 11/9/2020

Longer Game:

The EU has fired its initial salvo against Amazon for breach of antitrust rules, portending regulatory actions against other US big techs.  Similarly, reflecting the government’s growing concerns over the influence of digital platforms, including Alibaba and Tencent, China released a draft antitrust guideline to rein in internet-based monopolies.

Bonus:

In an interview, Secretary of State Mike Pompeo stated that Taiwan hasn’t been part of China. A few hours later, China finally congratulated Biden on winning the election. 

Top News:

11/02: Election jitters notwithstanding, investors cheered positive manufacturing data across China, Europe, and the U.S. in October.  U.K. became yet another European nation to re-impose a lockdown to stem rising infections.

11/03: Amid a dearth of major catalysts, investors appeared to have bid the U.S. stock markets higher on hopes of decisive elections results, even while some have argued against such optimism (here, here).

11/04: Investors appeared to have looked past the undecided presidential election, focusing, instead, on the unlikelihood of Democrats regaining the Senate, where one market bull was relieved “the [Biden] tax increase is off the table.”  Adding to market cheers was the U.S. services sector, which continued its recovery in October, albeit at the slowest pace since May. 

11/05: As Democrats inched closer to seizing the White House, protracted legal wrangling continued to unfold over vote tabulations.  As expected, the Fed stood pat in its monetary policy, with Chairman Powell adding that further congressional action on fiscal stimulus is “absolutely essential here.” This need is reflected in the latest jobless claims report, which showed that at least 21.5 million people were still receiving benefits in mid-October. U.S. reached record highs both in daily new Covid cases nationally and in hospitalization rates in numerous states.  In Europe, the BOE decided to further inject liquidity into its monetary system to avoid a double dip recession.

11/06: Stronger than expected job gains in October lowered the U.S. unemployment rate to 6.9%, while more than half of the jobs lost to the pandemic have yet to be regained amid resurgent Covid cases.

Heard on the Street:

“Even with this situation, with divided government, which should keep somewhat of a rein on massive growth in government debt, we still see this trajectory as being only one way. So we see real yields extremely low, we see debt still increasing at a fairly rapid pace, and, net net, we still see that being a fairly decent environment for gold investors.”

— Jim Smigiel, CIO at SEI Investments, quoted by MarketWatch on 11/6/2020

Longer Game:

Should you make 401(k) changes based upon election expectations? It’s ill advised to allow political hunches and emotions drive long-term investment decisions: not only are there no appreciable differences in outcomes under either a Democratic or Republican administration, the picture is decidedly mixed when control of Congress is added into the equation.

Regardless of the winners of this election cycle, Neil Howe, a scholar of demography, believes the U.S. is in the middle of a “Fourth Turning,” which may bring about a “secession crisis,” open conflict with China, and inflation.

Bonus:

Lest there be any doubt that the Fed is a key driver of the stock market, analysts at Société Générale estimated that quantitative easing contributed to 57% of the rise seen in the rate-sensitive NASDAQ index since 2009.

Top News:

10/26: Resurgent Covid infections across the U.S. and EU heightened concerns over an extended recovery process, particularly in view of the fiscal relief legislation mired in partisanship.

10/27: The U.S. Senate adjourned until Nov. 9, abandoning any additional endeavor for a pre-election fiscal deal.  Business spending continued to rebound as durable goods orders rose for a fifth consecutive month in September. Unexpectedly, one measure of consumer confidence in October dipped slightly, driven by “a softening in the short-term outlook for jobs.”

10/28: Absent any positive catalyst, U.S. stocks extended recent weakness as investors focused on the worrisome surge in new coronavirus cases in 29 states, and weighed the likelihood of contested election scenarios.

10/29: Better than expected U.S. 3Q GDP and weekly jobless claims reports notwithstanding, a full recovery to pre-pandemic levels remains elusive, especially in light of further Covid-induced disruptions.  To cushion some of the blows from lockdowns reimposed on the Continent, the ECB hinted at additional monetary stimulus by promising to “recalibrate its instruments, as appropriate, to respond to the unfolding situation.”

10/30: American consumer income and spending capped off a strong 3Q recovery in September, while a key inflation indicator came in at a mild 1.5%.  Given the rearview mirror nature of this data, however, investors questioned whether such momentum can be sustained, considering looming public health worries and political uncertainties.

Heard on the Street:

“The question now is whether another reminder of crashes past could emerge to create a psychological sense of the risk.  A further pickup in coronavirus cases, a chaotic or violent election or any number of other events could well shake people up… We may be at something of a crossroads.”

— Robert Shiller, Professor of Economics at Yale, in an op-ed on 10/23/2020

“If an election dispute drags on – perhaps into early next year – stock prices could fall by as much as 10%, government bond yields would decline (though they are already quite low), and the global flight to safety would push gold prices higher… investors should be preparing for the worst, not just on election day but in the weeks and months thereafter.”

— Nouriel Roubini, Professor of Economics at NYU, in an op-ed on 10/27/2020

Longer Game:

“Global investors tend to be very Western-centric.  A number of countries have done a much better job of dealing with the virus without inflating their budget deficits and printing money… There is a substantial economic divergence between East and West.  As investors, you shouldn’t let yourself be completely locked into the West.”

— Bob Prince, co-CIO of Bridgewater Associates, in a Bloomberg interview on 10/23/2020

Bonus:

Researchers from Imperial College London found that “the proportion of people with detectable antibodies is falling over time,” raising concerns over the durability of antibodies and leaving unanswered the question of reinfection. 

Top News:

10/19: Investors held onto ephemeral optimism for the passage of a pre-election Covid relief package by Tuesday.  Cementing its status as the world’s only economic engine this year, China reported positive 3Q GDP growth, even if the tally fell shy of expectations.  In Europe, a “no deal” Brexit has become a distinct possibility.

10/20: Despite a unilaterally self-imposed deadline, House Democrats and the White House continued negotiations over the fiscal relief bill  A second late-stage U.S. vaccine candidate may be ready for FDA review for emergency use before year-end.  In addition, the Justice Department filed an antitrust lawsuit against Google.

10/21: Vacillating opinions on the likelihood of a second U.S. fiscal recovery bill continued to whipsaw market sentiment.  Painting a picture of uneven recovery, the Fed’s Beige Book showed economic activity in the U.S. was “slight to modest.”  Against a backdrop of renewed fears over an uptick in infections in Europe, EU’s top Brexit negotiator struck a more positive tone on negotiations, even as U.K.’s upper house of Parliament dealt a blow to its own government’s position.

10/22: While the Street welcomed the lower than expected weekly jobless claims tally, it remains wary as to whether such improvement can be sustained.  September’s Conference Board Leading Economic Index increased, while concerns were noted over the “decelerating pace of improvement” heading into 4Q.  Existing home sales jumped, notching a fourth straight month of increase in September.

10/23: FDA approved the first Covid treatment for emergency use, in spite of one WHO study finding it had “ little to no effect” on mortality.  A key gauge of senior business execs indicated the U.S. economy grew at the start of the fourth quarter, while the same survey showed a mixed picture for Europe, where the reading dipped due to contraction in the service sector.

Heard on the Street:

“The prospects for an actual deal still remain minuscule as the Republicans in the Senate vehemently oppose the size of the stimulus discussed, but hope runs eternal in the markets and investors continue to remain optimistic that if some sort of deal is reached between the White House and the House of Representatives then the momentum and pressure from Trump will force the Senate to cave and approve the package.”

— Boris Schlossberg, managing director for at BK Asset Management, in a note on 10/20/2020

Longer Game:

According to one prominent strategic affairs analyst, the Quad – a loose coalition comprised of Australia, India, Japan, and the U.S. – will accelerate its multilateral security cooperation to ensure a “free and open Indo-Pacific.”

Bonus:

Do the affluent invest differently?  According to one recent behavioral finance study, while there are areas of commonality amongst the well-off and everyday investors, there are appreciable differences in attitudes toward engagement of professional advice, risk-taking, and active vs. passive investment management.

Top News:

10/12: Recent consumer spending data suggest China may be “first in, first out” from pandemic recovery among major economies.  In stark contrast, U.K. unveiled a three-tier lockdown system in order to stem rising infections.

10/13: While U.S. inflation remained muted in September, cautious commentary on economic outlook from two banking behemoths attracted attention.  Temporary setbacks (here, here) on the pharmaceutical front against Covid also restrained market bulls. Across the Atlantic, European markets were weighed down by U.K.’s disappointing jobs report and souring investor sentiment in Germany.

10/14: While September wholesale prices jumped due to a rebound in leisure-related services, overall inflation remained quite low. Hopes for a follow-up stimulus before the election have all but faded, for now.

10/15: Signaling a stalling recovery in employment, latest weekly jobless claims rose to a seven-week high.  Restrictive schemes reimposed by key European nations cast a pall over an already tentative recovery, prompting the ECB president to say “if more is needed because the situation deteriorates, then we will do what is necessary.”

10/16: U.S. retail sales grew at an unexpectedly strong 1.9% in September, even as concerns linger as to whether such momentum can be sustained in the face of resurgent infections.  October’s preliminary reading of consumer sentiment rose, as current concerns were offset by “continued small gains in economic prospects for the year ahead.” A joint US-German vaccine seems on track for FDA’s review for emergency use by late November. 

Heard on the Street:

“I actually think owning 25% gold isn’t crazy right now. Nor do I think owning 25% cash is crazy… I don’t think people fully understand how many business closures there’s going to be in the next few months… It will be quite a pleasant experience to not be in the car on the first wheel of the roller coaster that’s coming. I just want to be very low risk right now.”

— Jeffrey Gundlach, CEO of DoubleLine Capital, in an interview with Real Vision on 10/9/2020

“If they don’t pass some sort of bill quickly, how many businesses will go under, how many missed payments will we see on rent, debt service, and utilities? The next few months are really critical. I’m quite amazed that there’s quibbling over a hundred billion dollars here and there with so much at stake.”

— David Rosenberg, president of Rosenberg Research, as quoted by MarketWatch on 10/10/2020

Longer Game:

In its continuing push towards a cashless society while maintaining centralized control, China’s central bank gave away $1.5 million of its nascent digital currency in pilot programs.

Bonus:

While upgrading its 2020 estimate, IMF updated its 2021 global GDP growth forecast to a slightly lower rate of 5.2%, citing persisting economic disruptions. Meanwhile, OPEC also ratcheted down its oil demand expectations for next year. 

Top News:

10/05: U.S. service sector exhibited strengthening recovery for a fourth straight month in September.  In Eurozone business activity, by contrast, weakness in the service sector contributed to a meek increase.  Averting a looming deadline, Brexit negotiators agreed to an additional month of talks.

10/06: Fed Chair Powell again advocated for aggressive fiscal and monetary stimulus.  Nevertheless, any additional congressional stimulus plan appears dead, for now. Elsewhere, antitrust reform of U.S. tech behemoths also garnered attention.  Finally, a leading joint U.S.-European vaccine candidate will undergo an expedited “rolling review” by the European authorities.

10/07: After numerous false starts, investors pinned their hopes on piecemeal fiscal relief bills.  Eli Lilly has applied for emergency authorization of its Covid treatment.

10/08: Weekly jobless claims dipped to a post-pandemic low, albeit still quadruple the pre-crisis average.  An Administration official suggested vaccine trial data may be ready for government review by Thanksgiving.  Regeneron has also requested FDA approval of its Covid treatment in emergency use.

10/09: Conflicting signals aside, hopes for a more comprehensive fiscal recovery bill were rekindled.  Gilead’s Covid treatment shortened recovery time, according to final results published in the New England Journal of Medicine.  U.K.’s tepid August GDP growth proved worrisome, given it has subsequently tightened Covid-related restrictions.

Heard on the Street:

“One of the theories around the current context for markets is that a lot of it is quite dependent on ever-lower real interest rates… .  One of the big concerns I would have is that investors have allowed … their portfolios … to get sucked into an ever smaller vortex of recent winners … in the assumption that the future looks a bit like the recent past… .  However, history is littered with examples of changes.”

— Will Hobbs, Barclays’ CIO, as quoted by CNBC on 10/7/2020

“I don’t see really significant, anomalous valuations in the market, and that takes me to this idea of staying invested, being diversified, but not being too tactically adventurous.”

— Joseph Little, chief strategist at HSBC Global Asset Management, as quoted by MarketWatch on 10/9/2020

Longer Game:

While still anticipating 3Q U.S. GDP growth to “reverse much of the 31% annualized decline from the second quarter,” a survey of 52 business economists shows lower annual forecasts of -4.3% and +3.6% for 2020 and 2021, respectively.

Examining the disconnect between Wall Street and Main Street, economist Kenneth Rogoff expects higher corporate tax rates and other populist pushback on the horizon, unless there’s a “broad-based recovery in both health and economic outcomes.”

Bonus:

How do U.S. elections look from abroad?  According to a polling of 30 Asia-based market analysts, 11 are expecting a contested election, prompting a clear majority to increase cash levels and other safe-haven assets, including gold.