PODCAST: A Brighter Future with Laidlaw, Episode 31 – With U.S. Election Now Passed, Time For A New Bull Market Cycle?

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In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, discusses the early take on the incoming Biden Administration and positive COVID vaccine news, the takeaway from the November Jobs Report, the “Growth Scare” limiting market acceptance of strong Q3 2020 earnings, how will gridlock in Congress shape the Biden Administration’s impact on different sectors and other developments with Laidlaw & Company Chief Market strategist, David Garrity.

The topics discussed in this episode are: Will government transition uncertainties and the COVID resurgence “growth scare” dampen the post-election rally?, Will Labor Force Participation rate recovery continue absent widespread COVID vaccine availability?, When will the market fully buy into the corporate earnings recovery? and Is the Biden Administration simply a re-opening trade or a restoration bull market cycle? 

Please tune in for more timely insights.

SCRIPT:

Hello and welcome to another episode of “A Brighter Future,” Laidlaw & Co’s Podcast Series.  I’m Rick Calhoun, CEO of Laidlaw Wealth Management, and once again I am joined by David Garrity, Chief Market Strategist for Laidlaw & Co. 

David, I hope you had a nice weekend and you were able to relax a little because while the election is now over we still have COVID and a shaky economy.     

Rick, the weekend brought sunshine and 70-degree temperatures that were in distinct contrast from the 5” inch snowfall and frost of just a week ago. It was as if the weather was mirroring the change on the margin in the U.S. political landscape with the declaration of victory for the Democratic Biden-Harris ticket. 

While the break in the weather was welcome, it is critical for everyone to bear in mind that cold weather will still set in during the days ahead. In terms of the election, important to honor the fact that over 70mm voters cast their ballots for the incumbent, so the road forward is going to rely heavily on finding a way to heal the country.

To that end, the new administration is setting as its top priority the goal to contain the COVID pandemic that is plaguing the country and the world. We will watch with great interest the announcement of the new team of experts being brought on to conquer this challenge. 

If the new administration can bring meaningful relief from COVID before the end of Q2 2021, the country as a whole should be reassured as to the efficacy of good government. With this kind of leadership in action, perhaps for the world at large a broader faith in the future of America as leading in the vanguard of democracy will be reaffirmed.

In this regard, this morning’s news of positive COVID vaccine developments from Pfizer (PFE) is very timely. If the developments hold true, there should be a sufficient amount of vaccine available for 650mm recipients by the end of 2021. Good news indeed and a welcome break.    

Question 1:

As I said in the opening, the election is now behind us and the markets appear to like the outcome.  U.S. stocks logged their best weekly gain since early April, logging a +7.3% gain for the full week.  It appeared that markets found some relief in the prospects of a divided government, with a Biden presidency and a Republican-controlled Senate reducing the likelihood of immediate tax hikes and increased regulations, while not removing the potential for an agreement on some form of fiscal-aid package.  

So, can investors let their guard down when it comes to election-driven volatility?  In addition,  do last week’s gains mean the economic recovery, along with monetary- and fiscal-policy tailwinds, will be behind the wheel as we advance, not simply the occupant of the Oval Office? 

Rick, while the election is behind us, the transition to the next administration taking office which will occur over the next 10 weeks is not. Specifically, as the incumbent has not conceded defeat, the current administration has refused to authorize the customary access to government facilities and resources given to transition teams. 

Clearly, the handover of government may not proceed smoothly, which would be just another incidence of the chaos that has been the hallmark of the current administration. That said, investors need to be watchful as there are still rivers that must be crossed on the road to 2021. 

Away from the transition to the new administration, investors clearly have shown signs of experiencing a “growth scare” around the resurgence of COVID. The NY and Atlanta Fed nowcast economic models only show projections of +2.9 to +3.5 percent for Q4 2020, a slowing pace of growth that could risk tipping over into contraction. This reflects real-time indicators (e.g. local and airplane trips) that consistently show slowing patterns of American mobility. Along with this, Google searches for a range of COVID-related topics is rising again (much as in March and June), indicating popular concern that could curtail consumer confidence.

That said, the Pfizer COVID vaccine developments are offering greater confidence that 2021 and 2022 will see a re-opening process for the global economy. While the market is poised to break-out to higher levels off the back of a Cyclical/Value rally, it is important for investors to recognize that the “growth scare” is real as long as COVID remains relatively uncontained. 

Separately, while the new administration promises a more highly-coordinated COVID containment approach, we will still have to wait out the next 10 weeks before it can be implemented. 

There is a brighter future that lies ahead, Rick, but it will still take some time to arrive. Note that based on past cycles market optimism tends to overshoot off the bottom. Also, incremental COVID outbreaks may well cause unsteady economic progress as we move into 2021.

Question 2:

David, largely overshadowed last week was the Fed’s latest interest-rate decision and Friday’s Jobs Report. 

On the Fed, not surprisingly the central bank left its policy rate near zero and reiterated its commitment to keeping rates lower for an extended period to support the economy. 

As far as the jobs report, Friday’s number showed the U.S. economy added 638,000 new jobs in October, pushing the unemployment rate down to 6.9%.  So, while unemployment is still double where it was before the pandemic, and the pace of new monthly job additions has slowed, what I have read indicates the October data is actually quite positive in that it confirms the labor market continues to heal, even if more slowly than we’d all prefer.

As far as monetary policy, historically stocks have performed well in periods of loose monetary settings. 

So, regarding the Fed, should our listeners expect as any tightening by the Fed is a few years away that Fed policy will serve as a potential tail-wind for the markets as we advance into 2021?  

And on the jobs number, can we see the continued strength in the job market as a sign that the economic recovery is still on track? 

Rick, relative to the Fed meeting last week, the result was no change in interest rates and the commentary following the meeting was largely a reiteration of Fed Chairman Powell’s last testimony before Congress. Namely, that further fiscal stimulus is needed to put the U.S. economy on a better footing and that the Federal Reserve remains on stand-by to provide what further monetary accommodation it can as needed. 

To our reading, with the possibility of gridlock in Congress should the GOP retain control of the Senate, the likelihood of lower interest rates for longer is greater since any fiscal stimulus package to pass Congress will likely be smaller.

Meanwhile, last Friday’s Employment Report did show some encouraging developments. Particularly, the Labor Force Participation rate for October showed some improvement from September (81.2%, up from 80.9%), but still a slow recovery from the April 2020 low (79.9%). Nevertheless, given the “growth scare” concerns it will remain important for investors to watch high-frequency indicators such weekly unemployment claims and other kinds of alternative data related to consumer mobility.

Question 3:

David, another thing that was overshadowed last week was Earnings.  We literally had hundreds of companies reporting their  earnings last week and like the hundreds that reported before them, the overwhelming majority reported much better than expected results. 

When the week began, the blended Q3 earnings year/year growth rate, according to FactSet, was -9.8%.  Following the reports on Friday morning, it had improved to -7.5%.  

In addition, as of Friday with 89% of the companies in the S&P 500 reporting actual results, 86% of S&P 500 companies have reported a positive EPS surprise and 79% have reported a positive revenue surprise.  If 86% is the final percentage, it will mark the highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began

tracking this metric in 2008!!

Finally, in aggregate, companies are reporting earnings +19.3% above estimates compared to the five-year average of +5.6%, according to FactSet! 

So, can we assume that while the earnings reporting might have taken a backseat to the election, the continuation of huge earnings surprises helps to substantiate rich valuations for many companies.  Which in turn, exposed the promising potential for a big pick-up in earnings in 2021 driven by the arrival of a COVID vaccine (a demand driver) and the improved operating leverage from cost-cutting actions in 2020? 

Rick, clearly the focus on the election since the start of October has obscured the significant positive that corporate earnings performance lends this market. As you highlight, Q3 2020 results have come in so strong that the quarter is ending up at $38.58/share for the S&P 500. That is +16.3% better than what analysts had in their models at the end of September. 

However, apart from the election obscuring the news of better-than-expected earnings performance, investors are also experiencing something of a “growth scare” as the Q3 2020 performance is not seen as sustainable as concerns mount that with the resurgence of COVID fears of a “W-shaped” recovery rise. This is underscored by the fact  that S&P 500 earnings estimates for the next two quarters are lower than Q3 2020 (Q4 2020 $36.86/share, -11.8% year/year; Q1 2021 $37.83/share, +13.5% year/year). 

Still, looking ahead, S&P 500 earnings are forecast to surpass the 3Q 2019 peak of $42.21/share by 3Q 2021 ($43.88/share, +13.7% year/year). As the stock market tends to look 6 months ahead, we expect that positive COVID vaccine news from the likes of Pfizer (PFE) will serve to bolster confidence in the likelihood this forecast earnings curve will be realized. A shot in the arm the market needs to move higher into 2021.

Question 4: 

David, as we bring another episode of A Brighter Future to a close today, I’d like to finish where we began and talk about what our listeners can expect longer term from a Republican Senate and a Biden presidency.   Specifically on things like: 

• Taxes

• Stimulus

• Growth vs. Value

• Lockdowns

• Sector Winners

• Sector Losers

Personally, I think the framework for this outcome should be the last two years of the Obama administration, where essentially nothing occurred from a policy standpoint, and the market grinded out small returns (S&P 500 rose about +11% over those two years on a total return basis). Point being, not great numbers, but the outlook over the medium and longer term for equities remains constructive beyond politics.  What are your thoughts? 

Rick, while it may be instructive to look at the last two years of the Obama administration for an investment template, I think it could be premature as control of the Senate is likely to be determined by the two run-off elections in Georgia coming in January 2021 that may result in a 50-50 tie with VP-elect Harris holding the deciding vote. However, even if the GOP does not hold the Senate, the Democratic position is only one of a slight advantage so the ability to pass broad policy initiatives will be limited. 

That said, tax policy will be hard to change, stimulus packages will most likely err on the low side, Growth will offer a clearer advantage over Value until the global economy recovers off broader availability of COVID vaccines, and better COVID containment will likely be due to executive orders.

Under the Biden Administration, the more closely a company interacts with individual American consumers, the more pressing are matters of COVID restrictions and wages. For technology and industrial companies, trade and visa policies are key. With the promise of a more effective COVID containment effort under Biden, demand for consumer-facing businesses will recover faster, but the partial offset is the possibility of higher costs reflecting an increase in the minimum wage. 

With Biden more likely to return to multilateral trade regimes as a means to address the challenge of state-subsidized competition from China, manufacturers particularly in the aerospace sector will  benefit. Producers of materials as steel and aluminum are likely to continue to benefit from tariff protection. 

For technology companies there will be continued regulatory scrutiny, but in our view the moves will be incremental. On balance, the possibility of a return to greater global economic cooperation offers an opportunity for semiconductor companies to maintain market leadership, although China is clearly intent on establishing its own national champions. 

On balance, Biden is good for the technology sector, with the possible exception of social media companies such as Facebook that were the conduits, unwitting or otherwise, for social destabilization efforts around the election and over the course of COVID. For that kind of chaos, a price is likely to be paid.

Overall, we believe the Biden Administration represents not just a re-opening trade, but more importantly a restoration bull market cycle that is founded on the broader policy effort to build back better not just for the U.S. economy alone, but for the world at large.