The Week Ahead: Are We Going To See a Repeat of the Post-Spanish Flu Roaring 20s?

What do you think was the main driver of the market last week? The big news, which really drove the markets, I'm thinking that was Biden signing the 1.9T stimulus package.

On this week's Week Ahead:

  • Tech is facing a two headwinds. 
  • S&P500 unwound mid-Feb overbought - pullback test to late-Jan low just under 3,750
  • US Banks have been rising since January
  • Crude Oil: Overall trend remains bullish - rising trendline making consistently higher highs and lower lows 
  • Rates: Monday yield on the 10-year Treasury rose to a new 52-week high, closing at 1.59%. 
  • INFLATION: Worried? In the near-term, the upcoming YoY trends for headline inflation are going to look terrible thanks to “base effects”. Ignore that noice - the pandemic induced price declines last year make the data useless
  • Feb 2020 employment 152.5M
  • After rising slightly first week of March, initial jobless claims were again lower last week at 712k, which was 13k below expectations. 
  • Last Thursday’s Flow of Funds from the Federal Reserve revealed that total debt is growing at the fastest pace since the fourth quarter of 2004 with corporate debt sitting at more than half of GDP. While that sounds bad, at the moment corporate interest payments are only about 4.2% of corporate debt so that while the level is high, the service costs are low… at least for now. 
  • Big Question - are we going to see a repeat of the post-Spanish Flu Roaring 20s?

Bottom Line

  • Bonds can rally when stock market rebounding
  • Reminder, that after the roaring 20s when the stock bubble burst, the low of on the Dow in 1932 was 40% BELOW where it was at the start of 1920

Listen to Advisorpedia's Week Ahead ... Powered by Tematica Research's Lenore Hawkins and Chris Versace and find out what's coming. The must listen podcast of your Monday.

Resources: Tematica Research | Chris Versace | Lenore Hawkins

In Case You MIssed Last Week's: The Week Ahead: Data Might be the Key Commodity of the Future



Lenore Hawkins, Chris Versace

Chris Versace  00:02

This is the week ahead, brought to you by Advisorpedia and powered by Tematica Research. I'm Chris Versace Tematica as Chief Investment Officer and joining me as usual is Tematica’s Macro Strategist. Lenore Hawkins, winner. I gotta tell ya, crazy week. Last week crazy? Yes. . .

What do you think was the main driver of the market? And I say that full eight knowing the answer. But also knowing that there wasn't a lot of lot of big economic data, there are a couple of data points that we had to really focus in on. We had a lot of stuff happening in Washington, but when you had to strip it all down, what was the key driver last week?

Lenore Hawkins  00:52

So probably not the fact that the Kong Vs Godzilla movies coming out? That's probably not it. That's not what you were thinking.

Chris Versace  00:59

I was gonna say real quick, real quick, just so we can all be set up here. I'm going team Kong.

Lenore Hawkins  01:04

Hong Kong with a slight possible a little bit of an empathetic with Team Godzilla, but I'm team Kong.

He's the king. So you know who's not the king? tech, Ben Bernanke, key

Lenore Hawkins  01:18

Tech, oh, Tech right now. But what is the king is spending? So the big news, which really drove the markets, I'm thinking that was Biden signing the 1.9. And let me get this straight trillion dollar stimulus, which is really incredible. 1.9 trillion. That is the big I mean, it's so big. It's, it's just so big. So

Chris Versace  01:41

So let's let's frame this properly. Right. So coming into last week, there's a lot of room for you know, it does it does it does, I just want to just for the listener, I want to I want to frame this. So coming into last week, there was a lot of concern about the recent rise in treasuries, particularly the 10 year, lot of underlying concern, as we talked about, regarding inflation, does the economy get overheated as a result of what you were just mentioning, gets passed, and these checks start to roll in? Yeah. And so that was really again, like the key driver, you know, and I think if we were able to show some charts on here, we would show that as treasuries moved higher, and then trade it off, and then trade it up again, on Friday of last week, the markets to the exact inverse of that.

Lenore Hawkins  02:27

Well, let's look at that. So Monday, as past Monday, the yield on the 10 year Treasury rose to a new 52 week high, it closed just under 1.6%. But at the same time, the 10 year break even inflation rate, which is a nominal yield less the real yield that close lower. And what that really is telling you is that the rising rates really haven't been driven so much by inflation fears. And we're going to get to that, to talk about how all this to headline talk about inflation, it's a little misguided. We've seen the spread between the 30 year and the 10 year, and that tends to rise with inflation years has also been declining. But on the other hand, we've seen the spread between the two year in the five year continue to rise. And that what that's really telling you is that there's concerns more about upcoming rate hikes really than about longer term inflation. And then last Friday, the 10 year yield rose above 1.6%. After some consolidation during the week, it's now hit its highest level in over a year. So, yes, go ahead.

Chris Versace  03:28

So I was gonna say is that, you know, the data in the two data points that we got last week, if people were watching just to keep an eye on inflation were the February CPI, February PPI, and neither one of them really pointed to any inflation, particularly when the Fed looks at core inflation. And I know your issue with that strips out food and energy, which eats like 20 25% of every consumers pocket. Right?

Lenore Hawkins  03:50

But they're volatile. And let's since you brought it up, let's talk CPI, the CPI report for a friend for Friday for February. So headline came in as expected at point 4%. But the core, like you said was just point 1%, which was below what was expected. They were looking 4.2%. Now, year over year headline was up to 1.7% from 1.4. But the core actually slowed to 1.3 from 1.4. and is now the softest since June. So if we look at core inflation over time, and remember what you've been hearing, and we've been everything, oh, the markets are getting all stressed out about inflation. Really. Okay, let's talk core inflation. It was 1.7 in August and September dropped to 1.6. October through December, dropped to 1.4 in January, and then dropped to 1.3 in February. So it's gone from 1.7 1.6 1.4 1.3 down again and again and again since last August. So we want to talk to you about inflation. Okay, let's also look at the three month trend annualized, going back to August, because that that'll gives you a little But different Aug. 4.6, September 4.4, October 2.5, November 1.8, December 1.2, January one and February 2.7. Wait a minute. So the headlines are screaming all about inflation. And yet what you see if you really look at the key numbers is it's been going down. Which brings me back to what we were talking about earlier, that really what we're seeing in the markets, all this talk of bonds, it's it's not really people knowing what's going on with the bonds. It's really concerned about a rate hike.

Chris Versace  05:32

And the Fed as we've talked about potentially being asleep at the switch and having to react bigger than when they might have if they reacted earlier. Right. What about though, you know, we've heard of like rising lumber prices, we've heard about how the streaming services are once again hiking their prices. I know I know, my at&t TV now bill is jumping some ungodly percentage next month. Do you think we might see some inflation pickup?

Lenore Hawkins  05:59

Well, I think what we do need to watch for over the coming months is what is termed base effects. So remember, here we are. So the annual this week is the one year anniversary of the pandemic. So we had which is you know, not exactly a Woohoo, to celebrate. It's more of a make this end. What we say the base effects, what that means is that this time last year, everything was crashing, demand fell apart, people are locked up in our homes through an awful lot of the year in the coming months. Plus it was just sheer panic. So prices tanked. So when you look at prices in the coming months, when we look at them year over year comparison, you're gonna see spikes. And that's just because there was a panic a year ago. And we saw this back in 2011. It's nothing to worry about. It's a short term interim thing. So ignore the headlines, this is really not telling you what's going on. What we are seeing now what we can also say that we're seeing in the markets is a bit of a shift in leadership. For example, the NASDAQ 100, which was the high flyer driving everything well, now it's only up as of Friday's close, it's up all of this NASDAQ 100.4%, the NASDAQ composite, which is a little bit more broad based still tech, but a bit broader of 3.4%. There we go even a little bit broader than that the s&p 500 is up 5%. And what's really interesting to me is if you look at the s&p 500, which is market cap weighted, versus the s&p 500, equal weighted, the equal weighted is up 10.6%. And what that's telling me is all those high fliers that were doing so great leading us up all the techie guys, they're not doing as well, but other companies more the value, they are moving up. The Dow is that better than the s&p up 7.1. And they your composite is up 8.2. Meanwhile, the Russell 2000, the small cap guys, those are the guys, and an awful lot of these guys are guys that aren't making a whole lot of money, or none. That's up 18.4%. So hang on, hold that leadership,

Chris Versace  08:07

Hold that thought because you said something that I just want to chat on. You said the Russell small cap heavy index, a lot of folks not making money there, which would seem to suggest that they might have to tap either the equity markets or the debt markets. And when rising rates that could get incrementally more expensive. And I think that's one of the thoughts that people have for tech. But I would argue that we're going to see a bifurcation in tech over the next, you know, couple of weeks, which before too long, we'll be in the march quarter earnings season. What I'm thinking is that big established tech companies, your Google's your Amazon's? Well, not only they have always access their positive cash flow generators. They don't necessarily Yeah, they don't necessarily need to tap the markets. It's going to be these smaller companies, effectively public startups, if you will, you know, that have to tap the market. And I wouldn't be surprised as a result that we get through the march quarter earnings season. And we see these numbers, these cash flow numbers in particular, that, you know, the those bigger, more established tech companies are going to continue to perform. They're also the ones candidly that are really being driven by a lot of our thematic tailwinds. Right. So I think I think we're setting ourselves up for that. And my suspicion just me just Chris is thinking that some of these tech companies that are selling off could be attractive entry points here for some folks.

Lenore Hawkins  09:36

Yeah, well, I think overall, we take a step back and look at kind of the charts because that gives us an idea of where things are really going. Like you said Tech's facing two headwinds. One's from rising rates. And the other is the prospect oddly enough of reopening the economy. And that means that some of those tech companies that were darlings during the lock downs, they're now facing some headwinds, because they were their growth was actually astronomical because we all had to switch to their services. I'm not looking at zoom or anything.

Chris Versace  10:07

You mentioned anyone that will zoom.

Lenore Hawkins  10:12

Even Microsoft with teams, peloton, things exactly and they did fantastic. They're still up a massive amount over the past year. It's just if we're going to actually be able to step outside of our homes, things are a little bit different versus the way the lock downs were. What we've seen with the s&p is,

Chris Versace  10:28

Wait a second, wait a sec on that thought. I gotta be honest with you. I'm still gonna show you why those. And for those who don't know what that is, when you go out, I was afraid to ask.  No, no, no, no, you go out into the world. And you use the little camera on Amazon to scan barcodes, find what you want, and instead having to lug all this stuff around. You just order on it and have it shipped to you.

Lenore Hawkins  10:51

Oh, I think that and I think one of the things that we've really not been taken into consideration because right now, that brings up employment, we've recouped roughly 53% of the jobs that were lost. In February 2020. Employment was at 152 point 5 million bottoms out last April at 132. Point 2 million, that's a loss of just over 20 million jobs. As of this February 2021, we were at 143 million. So that means we're still 9.5 million jobs below where we were a year ago, puts at about 53% of the jobs recovered. Now what I like to point out is an awful lot of those to your point that are not coming back probably ever is going to be in retail, because people learn to buy online. And that's not going to change. It's convenient.

Chris Versace  11:41

Right? I I agree with that, I do think that we will see employment tick higher as the economy and states continue to open up, I don't think we'll get back to where we were to your point, though,

Lenore Hawkins  11:51

I think it's gonna take a long time, we've got two things going against it, a couple of things, actually, one of them is the shift in retail, everybody moving, we're forced to move online. And once that behavior gets shifted there you're comfortable with it becomes more of the norm may just stay that way, I think it's gonna stay that way for a long time. And also a lot of small retailers went out of business, and they're not coming back, right longer small retailers, or small restaurants, they went out of business that couldn't survive all of these lock downs, and they're just not coming back. So the jobs aren't coming back. The other thing is, the lock downs forced a lot of automation. So we saw automation in the corporate sector, right, because people couldn't work in the office together. So we had to shift to more corporate automation. We also see industrial automation, where shop floors, manufacturing, they couldn't bring everyone back in once they were able to open up again. So they had to shift to more automation. As you know, keeping people safe keeping people apart, you had to have as good if not better productivity with a lot fewer people. That means those jobs aren't coming back as well. Now, that doesn't mean that they won't be replaced with jobs to manage all that automation. But it's a bit like the horse and buggy to the car. Right? They're just going to be very different jobs.

Chris Versace  13:04

So I have one word for that you can feel free to counter ready. Robots.

Lenore Hawkins  13:09

Yeah. More robots, more room. Otherwise known or the iRobot, otherwise known as the cat carrier.

Chris Versace  13:18

Yeah, I had an AI robot and I had a puppy. And you can imagine what happened to the girl? Well, yeah, no, no. Anyway.

Lenore Hawkins  13:25

So we can look at though when they came out just last week when we're looking at the markets is just how heavily invested people are in the markets. So last week, had a really interesting report. It's the flow of funds from the Federal Reserve. And there's two big takeaways out of that thing for me. One was that the total debt in the US economy is growing at the fastest pace we've seen since the fourth quarter of 2014. That was pre this new stimulus, right? corporate debt is sitting at more than half of GDP. And while that sounds bad, interest payments aren't so tough, because interest rates are so low, at least for now, as long as these interest rates stay low. But what was really interesting to me is to see the extra equity exposure for households. So if we look at the funding flows report, it doesn't look at mutual funds. But if we include all equity investments, and then add in the mutual funds, exposure in the last quarter of 2020, which is what this report is looking at is 38% of all financial assets. Now that's just slightly below the all time high of 38.3. So that means that 38% of everything that households own is already in the equity markets, we're hitting a record high on that. equity exposure as a percent of all financial assets hit a record peak of 27%. So households are super exposed to equity markets. That's usually a bit of a contrary and negative I mean, we've never seen where that is in the contract negative side. That doesn't mean that the markets can't go up more from here, but People are pretty awful.

Chris Versace  15:04

Did you see the report from Deutsche Bank that found I guess they did a survey and they said that of all the respondents they looked at, they're gonna look to take about a third roughly $500 out of their stimulus checks. So 500 out of 14 $100, and plow it into the market. And and according to the Deutsche Bank math, it says that's going to inject about another 750 billion into the market. And I was I saw that, and I'm like, Huh, what does that sound like? Oh, yeah, when I used to get my stock tips from my bagel guy, when from my waitress back, you know, 20 years ago, and I'm not gonna say that it's a classic sign of a top, but it sure feels that way.

Lenore Hawkins  15:42

It's very concerning. And it definitely shows that that it's not a positive indicator for the future of the markets. But what I would also point out, though, is that you take that this fiscal stimulus added into all the pressure that the Fed is under. And we could have, we could see this market really get going even faster. Because what does that when you say that hang on when you say that? Like, what does that reason, the reason being is, we cannot afford as a country to really have stock prices go down a lot, because the tax receipts from capital gains are really dependent on that. So we've got this spiral going, right, where we just borrow more, the government spends more, the government needs to take in more receipts, and you've got a ton of retirees who need their portfolios to go Well, you've got a massive amount of money that the government owes people in the form of the Social Security, right, all of the Social Security, Medicare and all that you cannot have the headwind of a falling economy, which has been evidenced by every time the market gets a little bit nervous over the past decade plus the Fed steps in.

Chris Versace  16:51

So let's circle back to what you said earlier about those 9.6 million jobs that we're kind of in the hole on right now. And they're all coming back. If I juxtapose that against what you said, if you like, just now, that tells me that governments can be under pressure to really hike interest rates to cover that gap that you just talked about.

Lenore Hawkins  17:11

Except they want to borrow cheap. Mm hmm. So not really not going to be hiking rates to fight that, you know, not interest rates, tax rates, oh, tax rates. I'm sorry. I'm not focused on the bonds. No, you're right. That's why x rays, tax rates. Definitely. That's and that is a headwind to growth. But But when we haven't really cared so much about actual APS growth that much lately, it's been more top line growth. APS hasn't been a thing. Not that I'm saying it doesn't matter.

Chris Versace  17:42

I agree. I agree. I agree with the, the further stretch the market gets, the more important valuation becomes it's all great.

Lenore Hawkins  17:49

But that's that's this game. That's just tenuous game going forward. And I'm just saying, we could still see this market as crazy. It is, as it is as Toppy as it is. It could get crazier and it could get tough.

Chris Versace  17:59

Yeah. So before we were chatting, you said you wanted to compare all of this to the roaring 20s. So my response to like, yeah, see? Yeah, go ahead. Do it. Do it. Do it now. Yeah.

Lenore Hawkins  18:11

So we're here talking about, hey, all of us. We went through this this for pandemic and we saw that bad.

Chris Versace  18:17

Wait a minute, wait a minute, we're talking the 20s. Where's your flapper hat?

Lenore Hawkins  18:22

No, sir. I'll do that next time. So if you hear people talking about the post, Spanish Flu roaring 20s, except for back then the cyclically adjusted p e ratio, which kind of gets out short term, little crazy bumps and spikes, it was only five times earnings, versus today, it's 35 times and for to put that into perspective. Last year, it was only 25 times. So five times versus 35 times things are a lot more expensive today. Back then, if you can even wrap your head around this government debt to GDP was 10%. And if you do it all add in right now it's about 120%. Household tax expectations today are at a seven year high to your point that the likelihood of raising rates not just on the households, but on the corporate sector pretty high, given how much government spending is we're seeing insecurity over retirement incomes has continued to rise over the past four months, and that's with aging demographics. Back then we saw people rapidly coming into the urban centers that happened we've seen that happen in emerging markets where as people move from the rural into the urban you have productivity really booming. Productivity boomed back then saw consumer prices declining at an average yearly pace of over 1.5%. Back then the yield on the 10 year went from 5% to 3.5%. Yeah, get that inflation fell. During a booming stock market. It really can happen. And remember, though, at the end of the day after those roaring 20s when the stock bubble finally burst, the low on the Dow in 1932 was 40% lower where it was at the start of 1920. That's pretty uplifting, I have to say. So how about next week? Let's look at the future. Oh, hang

Chris Versace  20:06

Let's look at the future. Oh, hang on, hang on, hang on. The one thing that we point out about the 20s that you kind of skipped over is it was an unbelievable time of at the time, technological innovation. Yeah, that's a product. automobiles, telephones, film, radio, electrical appliances. And in that in the millions,

Lenore Hawkins  20:27

And in that respect, we could see that now we are starting to see that all the technology gains that we had in the 2000s. And then the teens, we weren't really seeing the boost in productivity we expected and it looks like the pandemic really kick started, what I think we're gonna see a productivity boom in the next 10 1520 years. So that'll be the thing that'll be deflationary.

Chris Versace  20:50

So in my, my best initial, as it says here, moving pictures with sound, I understand you want to talk about what's going to happen next week. Let's turn to that, shall we?

Lenore Hawkins  21:03

You have lost your marbles. Productivity Monday, we're gonna see the New York Empire State manufacturing report, we'll be looking at productivity there. We're also going to get on Tuesday retail sales. So that'll be interesting to see what's going on. We're gonna get as we get the the stimulus, what's going to happen with retail sales. And I'll also be looking to see are those those more durable goods, right, people have been buying couches and refrigerators and fixing up the house because they're spending a lot of time there is that going to continue and how many couches how many refrigerators you're going to buy. We also on Tuesday, get industrial production report. So again, looking at productivity, and we'll also get the nh nh B housing market report.

Chris Versace  21:45

Just one quick thing on retail sales. VSA was at a investor conference this week. And they said that in January, they saw a big rise in the use of debit cards and their overall transactions were higher because of the stimulus that we got in December. But they were saying that their fitting their business in February actually fell month over month, because people already spent that $600 that they had, I wouldn't be surprised if we see retail sales, dip down on a month over month basis. So just be prepared for that.

Lenore Hawkins  22:17

And that brings up a good point. Like as you look at this data, when you think about what's going on in the world these days, you really want to take multiple months an average across them, because we are getting these weird little spikes, like you know, check show up in the mail one month, and that's going to create a little bit spike that doesn't really tell you long term what's happening. We're also going to get building permits and housing starts for that super hot housing market and how long that's going to keep going on. And on Thursday, again, back to productivity with the Philadelphia fed manufacturing port. And of course, the always fascinating, weekly jobless claims, which it just kills me. We look at jobless claims every week. And it's true except jobless claims initial jobless claims continue week after week after week to be higher than they have ever been. Pre pandemic the highest jobless claims number we've ever seen ever in history was 695,000. That was in 1982. We have been seeing numbers above 700 since this whole nightmare started. So when you hear people talking about Oh, they're they're getting so good. And yeah, I mean, they are relative, you got you got to get your pandemic glasses on.

Yeah, True. True. I just want to take them off.

Chris Versace  23:25

So so that's the economic data. When we look at earnings next week, it's actually a kind of a slow week, next week there, there's, you know, maybe a little more than a handful of companies to really focus on in our opinion. Yeah, thank God. So we've got Accenture reporting, you know, we want to see what they're seeing in terms of their cybersecurity business. Same thing goes for CrowdStrike. Remember that? So far, we've had three high profile attacks, you know, the first being solar winds, and then Microsoft that was announced very recently regarding their email or outlook. And then there was another one, the name eludes me, but it was essentially an online cloud camera, business, and it was, companies like Tesla and a few others were violated. So it's going to be very interesting to hear what they have to say about it. Remember, we continue to think that as we can, as we become increasingly connected in 5g technology is going to do that this the dark underbelly of all that connectivity, is the increasing need for cyber security.

Lenore Hawkins  24:25

So we are both connected, the more you got to protect.

Chris Versace  24:27

Correct. And that's that's probably why we have an index for each one of those, something like that. Yeah, yeah

Lenore Hawkins  24:32

Well, I'm going to be hearing from FedEx, it's going to talk that'll be interesting with more of this, you know, how are we continuing our buying habits?

Chris Versace  24:38

I think so. The other one that I'm kind of looking forward to hearing about and this is kind of a sleepy little thing, but it's a company called cintas CTAs. They're a uniform company and to me as they come as restrictions and states fall in, businesses start to open. They're going to need more uniforms. So I'm reading kind of curious to what cintas has to say in their outlook to me that's of all the ones that we're going to hear from. And there's Lenore and there's Darden and I know one of your favorites, William William Sonoma as well. But to me if I had to single it down to one report to watch as a bead for the economy, it's going to be sent us to play. I think with that, perhaps we have a wrap. I guess that means in that week ahead.


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