Market Recap

 

Weekly Recap

In today’s world, just wait a week and the story will change. Last Friday it was all about the GameStop moonshot. This week, with the stock off over -86% from the closing high, not so much.

 

 

I can’t bring myself to go down the GameStop rabbit hole. Probably the best coverage I’ve seen comes from Matt Levine at Bloomberg. Suffice it to say, the moral of the story is simply people can do crazy things. And get enough people together in a (virtual) room and they can do really crazy things!!

 

Turning back to the economy and the markets, the major news of the week concerned jobs and the prospects for another fiscal spending plan.

 

Still in a Deep Hole

 

Friday’s payrolls report underwhelmed. Nonfarm payrolls rose 49k in January, 56k below consensus expectations. Prior months were also revised lower. While the virus weighed on the leisure and retail sectors, payroll growth was generally soft or negative across the private sector. The good news, though, was that the unemployment rate fell from 6.7% to 6.3%.

 

 

But the bigger picture is that we really haven’t even started to repair the damage to the labor market post-Covid. The chart below shows that the U.S. economy is still down about 10 million jobs from when the pandemic started. To put this in perspective, the current job losses from the pandemic are still about the same as the worst of the 2008 global financial crisis.

 

 

Go Big or Go Home

 

This naturally brings us to the topic of what to do about it. Early Friday morning, after some 15 laborious hours of the Senate mired in vote-a-rama, Kamala Harris cast her first tiebreaking vote on the budget resolution. This is a key procedural step towards passing the administration’s proposal relief package without the threat of a filibuster.

 

The highlights of the proposal are shown below.

 

 

One item that didn’t make it through was the increase in the minimum wage to $15 nationwide. It’s also quite possible that the income threshold for receiving direct checks will be reduced. However, the plan moves on to the reconciliation process. It’s unclear (and will remain so for weeks) what the final product will look like, but it should generally resemble Biden’s original plan. As Greg Valliere noted on Thursday before the Senate vote:

 

‘WITH NEARLY TWO-THIRDS OF THE PUBLIC favoring a “go big” Covid relief bill, there’s a sense of momentum in Washington that a package will pass within a few weeks.

 

IF IT’S NOT BIPARTISAN, Democrats don’t care — polls show the public overwhelmingly wants Joe Biden’s $1.9 trillion bill, and voters aren’t particularly concerned about whether it comes from a reconciliation process that excludes Republicans.

 

HERE ARE OUR ODDS ON THE FOUR COVID BILL SCENARIOS:

 

1. Chances of gridlock and no quick bill — Zero percent, there will be a bill by March.

 

2. Chances of something close to the GOP’s $618 billion package — Zero percent, the Democrats would never accept it.

 

3. Chances of a few Biden concessions, pushing the price tag down to around $1.5 trillion — 70 percent, the most likely outcome.

 

4. Chances of Biden getting nearly everything he wants, close to $1.9 trillion — 30 percent, cannot rule this out, but moderate Democrats might balk at that price tag.

 

BOTTOM LINE: The $900 billion approved a few weeks ago hasn’t been spent yet, so there’s going to be an infusion of well over $2 trillion into the economy in the next few months…’

 

And the prospect of all this spending is showing up everywhere. Oil prices above $56, a robust equity market, higher inflation expectations. Another sign comes from the yield curve – the difference between long-term and short-term interest rates. The chart below shows the spread between 30-year and 5-year bonds. It’s now at the steepest point since 2015, a sign that bond investors are pricing in a better growth environment, higher inflation, or both.

 

 

Finally, you can’t help but notice a paradigm shift taking place when it comes to fiscal spending. Just witness Mitt Romney’s proposal on Thursday. As the Washington Post notes:

 

‘Romney’s proposal would provide $4,200 per year for every child up to the age of 6, as well as $3,000 per year for every child age 6 to 17. Senior Democrats are currently drafting legislation as part of their $1.9 trillion stimulus proposal that would provide $3,600 per year for every child up to the age of 6, as well as $3,000 for every child age 6 to 17.’

 

Notice this isn’t a one-time payment – it’s every year. Almost certainly a step towards Universal Basic Income in some form or another.

 

Charts We Found Interesting

 

1. The recent fall in daily case count is encouraging.

 

 

2. Mainland Europe isn’t exactly covering itself in glory in terms of vaccine rollout.

 

 

3. Not even sure how to explain this – the UK loves its over 80’s more than the rest of the world?

 

 

4. Interesting that the longer you wait between the first and second dose, the more effective the vaccine. At least as it applies to the Oxford/AZ shot.

 

 

5. Ok, I have to say something on GameStop, even if just tangentially. The rally in GameStop and similar companies forced long/short funds to both cover their shorts and de-risk. They did the latter by selling their longs to reduce their portfolio beta. This behavior is called “de-grossing,” and it can turn into a feedback loop where losses turn into dramatic price movements. On Wednesday, the prime brokerage division of Goldman Sachs reported that funds recorded their sharpest single day de-grossing ever, including 2008, with a -10.9 standard deviation degrossing. In other words, if flows were distributed according to a normal distribution (they are not), Wednesday’s move would be roughly half an inch to the left of the arrow below. Somebody better at math than me can figure it out, but it should basically never happen. But of course, this being finance, it happens every four or five years.

 

 

6. I still can’t wrap my head around this. The Federal Reserve has almost 20K employees and pays them a total of $2.3bn a year. Wow!!

 

 

7. Cast your mind back 25 years to February 5th, 1996. You could buy one stock, what would it be? Microsoft? Sure. Amazon? Nope – they didn’t go public until May 15th, 1997. Apple? That would have been a tough buy. Business Week had a less than flattering article 25 years ago that started off with ‘Apple Computer, once the hip flagbearer of high tech, is in sad decline. There are lessons aplenty.’ It got worse from there.

 

 

 

Steve Jobs must be smiling. Apple was trading at a split adjusted price of $0.248 on February 5th, 1996. Today it trades at roughly $136. That works out to a compound return of close to 30% per year.

 

Have a good weekend.

 

 

 

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