The Week Ahead: The Dip Is Alive and Well

Lenore Hawkins  00:19

So Chris by the dip is alive and well. The markets are absolutely in and everything rally and we've seen the Bloomberg world index all green all the way through this week and it was has now been up 10 days in a row taking the index to absolute new highs. At this point. It's the winning biggest winning streak we've seen since 2018. And one of only a few that have lasted this long since 2004.

Chris Versace  00:46

Now … hang on, does that make you worried?

Lenore Hawkins  00:50

Normally, yeah, normally, I'd be really worried. But we'll go through this. So far. All the technicals nothing's indicating a pullback. Now. If I look at fundamentals, yeah, I'm worried. Okay, if you look at market movement, there's really no reason for concern. And what we've been seeing I mean, God, at least the past 10 years is fundamentals just aren't really all that big of a deal anymore.

Chris Versace  01:13

Right. And I know you're gonna get to this, but we also had Fed Chairman Powell speaking to the economic club of New York, not only saying I don't see any sustained inflation, not only saying that, you know, signaling the Fed is going to continue to keep interest rates low, but calling for the government to go big to stamp out the pandemic so that you just know that they're going to be unbelievably accommodative when it comes to monetary policy.

Lenore Hawkins  01:39

Yeah, Chair Powell made it very clear that there is one thing that worried about, and that's unemployment, that is the only thing that they are focusing on, and they are going to let inflation if we even get it, but they would let it run quite a bit before tamping anything down. And with that, what we've seen is financials that underperformed a lot of 2020 started rolling back to life in November, and they've recently broken back through their February all time highs are now kind of at the top of their channel. They're outperforming the s&p 500.

We saw a brief pullback in January, but the index is now pushing up against its high and while short term momentum is positive, we are seeing a little bit of negative divergence. And we're gonna have to have that sorted out. That could cause some hesitation in the move in the coming weeks.

But given the current overall market environment that we're talking about, and the positive technicals, we really think they can upside break is likely for this sector. We're also seeing small caps, the new must own hitting highs almost daily. The small cap indexes are overbought and overextended. But that's true of much of the market. And it just really doesn't seem to matter. New Highs are likely and we don't expect any pullbacks to be terribly dramatic support there around 2200 to 2150. And the nysc. Fang plus index continues its uptrend since the march lows, and really any pullback There has also been contained, it has been outperforming the S&P for quite a while both its short term and intermediate term momentum continuing to look good. Not quite as strong as we've seen earlier in this rally and support levels are around 6800 and then another one back at around 6500. Now on that note, it's interesting to note that non profitable tech companies have this year outperformed the s&p by 30 percentage points. I mean, 30 percentage points that that saying fundamentals really aren't.

Chris Versace  03:34

There's a lot of hope in in the market. That's what you're saying.

Lenore Hawkins  03:37

There really is. I mean, when you look at with record high deficits record debt to GDP, corporate debt to GDP at record highs amidst extremely high unemployment and 2020 GDP growth, that was the weakest we've seen since 1946. All while consumer confidence is sitting at seven years lows, naturally high yield is fallen to an all time low of 4.1%. There's no indication that that's going to be improving. We've seen the 10 year Treasury yield hit a new high though in Friday's trading, putting it at the highest level since March and the 30 years already written above the spring 2020 high.

Chris Versace  04:14

So do you how much of this do you think is predicated on the economy and APS expectations getting better because of the vaccine? And people really hanging their hat on a substantially stronger second half of the year?

Lenore Hawkins  04:33

Well, you've probably been hearing what I've been hearing about the roaring 20s and that that's what I'm into. I'm not seeing a repeat of the roaring 20s. I think the market is definitely pricing in a lot of expectations around life getting back to normal, maybe around q2 sometime. I think that's I think the market is going to be disappointed by how that's going to actually pan out and I think the market is looking at what's really going on, say in the unemployment market, where we're seeing a big gap between the median number of weeks unemployed, and the average or the mean a number

Now, what that means when those diverged, what it means is that those people who are highly employable, those who have skills that are in demand, are getting scooped back into the labor market very quickly. But we're seeing more and more that people who don't necessarily have the great skill sets that everybody wants are seeing their unemployment extend longer and longer. So you're seeing a longer a bigger structural problem with unemployment, more people getting stuck out of the labor pool, and not as a big drag to the economy.

Chris Versace  05:45

So I come at it from two different ways. The first point I want to make is, and you know, how focused I am on this on the moving level of expectations, whether it's for earnings, economic data, what have you. And I do think that the expectations for the speed of the vaccine are going to be met with disappointment. You know, if you do the math, you know, and you look at Biden 100 million vaccinations in the first, you know, 100 days, and then you gave out the rest of it, you know, simple calendar math, we're not looking, you know, for everybody to be vaccinated until well into the back half of the year. So I agree. So I think I think that's gonna be one resetting of expectations.

Lenore Hawkins  06:30

And I think one of the things people are ignoring is that the fastest growing segment of GDP last year was business spending on automation. We have seen at a time where the economy got hit the hardest, it's been hit since 1946, we actually saw productivity go way up. And that is because labor is being replaced with automation. That means those jobs aren't coming back.

Chris Versace  06:51

Well, I think that combined with the shift that we've seen, which will be sustained, no, there's no question about it, too. You know, digital, from what we can call brick and mortar or analog, whether it's, you know, ordering or the way we communicate the way we travel into various support industries. For all of that. There are a lot of jobs. It's not just restaurants, there's not just retail, there are a lot of jobs that structurally speaking will not come back.

Lenore Hawkins  07:16

We're seeing a lot of companies really change their business model. We talk a lot about how the pandemic has accelerated shifts that were already occurring. And Disney's earnings last week, or just another example of the switch from its traditional business. A traditional movie business towards its booming direct to consumer streaming business less than 14 months. This is amazing way less than 14 months after launching its in North America and the Netherlands on November 19th of 2019. Disney plus has already achieved what it set out to do in 2024, reaching 90 million subscribers. By January 2021, it hit 94 point 9 million. Now for comparison, it took Netflix between six to nine years depending on when you want to start counting to reach that many subscribers.

Chris Versace  08:00

Now with that in mind, let's move this along because I have someone division to get to.

Lenore Hawkins  08:06

Excellent point. We're also seeing that companies are expecting some of these shifts that we've been seeing because of the pandemic continue that Kraft Heinz announced Thursday that it plans transform that its plans to transform into a company that's focused more on growth is actually coming along faster than it expected. It increased its productive capacity for its highest demand products by 20% through August and it plans to further expand. That's a sign to me that it thinks that the eat at home play is going to continue well into the future. We're also seeing Hormel foods, buying planters nuts for 3.3 5 billion now that's the largest acquisition and it's 130 year history. Again, that's another sign that Hormel is expecting to see that kind of frugality eating at home trend continue.

Chris Versace  08:57

It's also a part of Hormel continued pivot and its business towards what we can call healthier for you alternatives. You know, they do have a line of plant-based products and things like that pea protein in particular, and they like other large packaged food companies are trying to really clean our sorry, pivot into what you and I call our cleaner living investment theme.

Lenore Hawkins  09:22

So are you looking for it next week?

Chris Versace  09:25

Well, you know, next week is kind of an interesting one, right? We've got a shortened holiday. There's been a short week is the holiday. Sorry about that. But we but we've got a lot of economic data. And I've got like 600 companies reporting and I know that seems like it's gonna be a little bit less than we had last week. 650, but it's in four days, really three and a half, because let's be honest, nobody reports on Friday afternoon. So let's take a quick look at what we're getting on the docket. So on Tuesday, we'll get the February Empire State manufacturing index. Why do we want to look at this because it's one of the first indicators for the month of February. Wednesday rolls out January retail sales, this is going to be a big report. We've also got the January industrial production in January housing starts. But to me the biggie is going to be that retail sales report are consumer spending? Are we seeing that historical dip that we see after the holiday season comes and goes? But more importantly, are people eating out at restaurants? Are people not? Are they just stay, continue to groceries? And are we continuing to see the shift towards digital shopping, that those points are going to be huge. And if you're a follower of you know, a company like Amazon or Chipotle, this is the data that you're going to want to be looking at. On Thursday, we've got you know, a variety of economic data points coming at us nothing also earth moving, but we will want to continue to watch not so much the new weekly jobless claims. But Lenore, I know you're a big fan of the continuing jobless claims for heat on the economy.

Lenore Hawkins  10:55

And also be looking at those home prices reports coming out next week. Because while home prices have been rising and accelerating pace with prices actually outpacing the growth of personal income many times over. We're starting to see some of the housing data roll over. And it'll be interesting to see which is going to win then because as we've been saying, the pandemic has really accelerated trends. One of them is the shift in housing as companies are deciding this whole work from home thing kind of works out for them. Spotify announced that it's adopting a work from anywhere model, which is going to allow its employees to work wherever they want, if they want to work at home full time or the office full time or sort of a mix. And they're also expecting to allow employees to determine their locations, they can pick a country in a city that they want to work earlier this week, Salesforce and now. Instead, it's going to let employees where they want to work. And they actually said the nine to five workday is dead. Square and Twitter have also been saying that they're going to let employees work from home forever. And even Microsoft is planning to be a lot more flexible, which means that the housing market really is changing. You don't have to be in those big cities anymore, paying outrageous prices for tiny little space.

Chris Versace  12:08

All true, all true. And that's something to be watching for the housing market, which has been not only sorry, the housing market, which has been el fuego, as have the companies that kind of work into that that ecosystem. exiting the week on Friday, we have probably one of the most watched before reports coming which is going to be the IHS market services and manufacturing flash PMI. Now, this is going to tell us the first real real look at how the US economy did in February, we'll also be getting on the same day, similar reports for Europe and for Japan. So we'll get another fresh look at the speed of the global economy. When we dig into these reports, we'll be looking in particular I think at two things, one, what's the order trend that will give us the first glance at how March might be shaping up? And then following the disappointing January employment report. We're gonna see what the what this data has to tell us about the jobs market in February. And anything else on that?

Lenore Hawkins  13:07

Well, we've been we've been seeing orders while the manufacturing sector has been quite strong more than we've been seeing orders starting to roll over. So that'll be one of the first things to keep an eye on.

Chris Versace  13:17

All right, so let's shift gears and talk about earnings for next week. Again, short week, four days, but 600 earnings coming at 600 corporate earnings reports coming at us. Among that 51 S&P 500 constituents. What that tells us is that as we get out of next week, about 85% of the S&P 500 rolled reported, and yes, we continue to see consensus expectations for the S&P 500 inch higher for 2021. You know, this is 1233 or four weeks now that this has happened. And now the consensus expectation between 2019 and 2021. It's about up 6.6%. So almost double what it was coming into the year. pretty important. Now in terms of who's reporting what we want to look at. We have CVS health reporting, we want to be focused not so much on their prescription business, not so much on front of store, but what are they saying as they start to deploy COVID-19 vaccines that will be crucial? We've got Hilton and Marriott reporting as well. You know, these are hospitality and leisure companies. What is the impact of the continued shutdown and travel restrictions on their business? We'll be eyeing occupancy excuse me occupancy rates, as well as their expectations for the coming quarters. When do they see their business turning isn't realistic. Shopify will also be reporting this as a platform company for digital shopping. It should post impressive year over year results for the December quarter. But the real key will be what does it look for in the first half of this year, which again, we tend to see a dip down into business but given the shift towards digital shopping, will they continue to outperform Boston beer also reports and Lenore I know this is one of your favorites because they own the hard seltzer market is hard. seltzer still hot. Is it still growing? Or is that market getting saturated? Let's see what the house of Sam Adams and truly have to say. Especially after watching the Super Bowl ads with that mikulov Ultra organic hard seltzer nonsense. Let's see what's going on there. We've also got a plethora of restaurants, companies in particular Wingstop, Cheesecake Factory and Jack in the Box now, same store sales, comps will be the crucial metric for the quarter. We've seen a number of restaurants report all negative. And I suspect that Cheesecake Factory probably will be negative. I say that because of the high in restaurant component of their business wingstop jack in the box we'll have to see. My take on this though is this. Chipotle, the shares got hammered when they missed their same store sales comps last week, and they reported and they delivered positive 5.7% on that chart

Lenore Hawkins  15:56

The tells you a lot right tells you a lot of optimism is priced in it tells you expectations are really high. And if you don't meet those really high expectations.

Chris Versace  16:05

Yeah, I think that's true. But I think when we compare the Chipotle a same store comps for the December quarter against almost everybody else. They're taking wallet share hand over fist, hand over fist,

Lenore Hawkins  16:17

More of that move to healthier foods,

Chris Versace  16:19

Well healthier foods in the Digital Lifestyle because they really embrace digital ordering. I can't tell you a week a week doesn't go by that I don't get a push notification from them for free. GWAC if I act now, who doesn't love freak walk?

Chris Versace  16:35

True. True. All right, let's, let's let's finish this up. One of the reports that I'm looking forward to and this touches on some of the stuff we talked about in last week's the week ahead is going to be applied materials. Right. You know, last week my shortage. Exactly. Chip shortage. So we heard a lot about that last week. We heard more about that this week, not just an automotive in the automotive industry but also in other ones as well potentially bleeding over into the smartphone market. So you know, when we think about tight semiconductor industry capacity, we think we have to add capacity that's means more semi cam semiconductor capital equipment. That's right in uplines wheelhouse, I think they're gonna have a fantastic print and their outlook should be bullish as well. But let's see what they have to say for how long this shortage might last and how deep it might go that will that could affect earnings expectations for other companies as a result, a couple other how other high profile earnings to be had Dropbox Roku, universal display and with that,

Lenore Hawkins  17:31

That's your week ahead. Thank you

SUMMARY KEYWORDS

reports, continue, week, business, companies, market, year, lenore, expectations, index, s&p, earnings, outperforming, unemployment, pullback, high, people, big, february, expecting