(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).
Stocks threatened to make new highs last week before investors realized that may not be so wise with the election looming on the horizon. Plus a second wave of the Coronavirus seems to be afoot with increased disruptions to the economy.
This realization had stocks down more than 2% since last week’s commentary. So a good thing we were hunkered down in our defensive portfolio that outperformed by a wide margin.
So the waiting game continues to see what happens with the virus, the election and much more. That will be our focus today.
Last week we contemplated if the summer bubble in tech stocks was back in charge…or would the market come up short of the highs and get back in line with the historically negative pre-election trends? Gladly we assumed the latter which indeed played out as stocks have fallen over 2% during the past week.
At this stage stocks are once again flirting with the 50 day moving average which is now all the way up to 3,404. No doubt we are set for another battle with this key technical level. And yes, I suspect that we will find our way breaking below that mark coming into the election.
The reasons to head lower at this time include:
- Historically very negative trends the final weeks into a Presidential election.
- The polls have tightened this past week. And given how the polls missed the mark so badly in 2016, there is no certainty in the outcome this time around either.
- An astronomical number of write in ballots nearly insures delayed election results until all are counted…and likely recounted.
- Previous statements, mostly by President Trump, questioning the validity of write in ballots = high probability of a contested election = very negative environment for stocks. Remember that Goldman Sachs has previously stated that such an event could lead to an almost instantaneous 10% drop for the market.
- Lastly, the # of Coronavirus cases in the US is clearly surging higher as it in Europe. This was expected as colder temperatures = more indoor activity = more chances for spread of virus. The worse it gets, the greater the likelihood of negative economic impact.
Reity, is it all negative out there?
Actually most of the economic indicators of late are quite positive as things are looking better than previously expected. For example, early Q3 earnings seasons results are showing equally impressive level of beats as found in Q2.
On top of this is a parade of positively received economic reports starting with impressive 5.4% year over year gain on September Retail Sales report. This was corroborated by the Redbook Weekly Retail sales report which has been in positive territory for 5 consecutive weeks. That is the first time that has happened since the Coronavirus came to town.
The employment picture continues to improve at an astonishing pace as this past week we saw another 1.1 million people come off the weekly unemployment claims. And going back the last two months we see greater than 5 million people removed from the count of continuing claims. This is no small feat that has and will continue to show up in improving unemployment rate.
The one negative rub with this improved economic picture is that it is actually starting to show up in inflation readings. Like the +0.4% month over month reading for PPI.
In some ways this is good news as a recessionary environment has people worrying about the economic monster known as deflation. So seeing an initial uptick in inflation is actually a sign of returning to full health.
However, the negative aspect of this is that the #1 thing propping up stock market valuations is how attractive stocks look compared to the low rates of bonds. As inflation picks up, so too does the rate on bonds. For example the 10 year treasure rate has rallied from 0.5% to 0.82% since the end of July.
Yes, that is still astronomically low on a historical basis. But if the trend continues and the rates start climbing back to say 1.5% as it was back in February, then it will start to make the value of stocks not so gloriously attractive as it stands now.
This will be a slow moving train. So don’t need to worry about any immediate impact. We just need to keep an eye on this over time.
For now, the gain in rates is also a positive for banks that do better in a higher rate environment. That is one of the things that led me to add (ticker reserved for Reitmeister Total Return members. Discover the portfolio here.) to the portfolio this morning. What I see is a long path of outperformance with shares still 50% below the previous highs. Add on top a 4% dividend yield and the odds of this trade paying off for us is very high.
So Reity, if the economy is improving and low rates still make stocks so favorable…why is it that we are so defensive at this time?
Just roll back to the top of today’s commentary for the bullet list of reasons why right now is not a great environment for share price advances. The strongest of those reasons to remain on the sidelines is an inordinate risk of a contested election. Something we have never really had to contemplate in our nation’s history.
Far too many Americans are ignoring this topic because we assume that there are clear rules in place for a smooth transition of power. This is shockingly not true as laid out in this article.
The President has some pretty far reaching powers that can be used, if so inclined, to not yield office. And given the very clear statements by the President, like at the first debate, he may not go quietly into that good night.
Long story short, I think it is fairly risky being aggressively long the stock market until this election is finalized. And for the 93rd time I want to qualify what is meant by “finalized”. And that is when the loser of the election concedes to the winner.
When that happens we will quickly move to 100% long the market with a slew of “growth at a reasonable price” stocks. That includes the likely overweighting of industries that will benefit the most from an improving economy including some of the most beaten down groups in leisure, entertainment, travel, energy and the banks.
Let’s hope that this return to 100% bullish starts in just two weeks’ time. However, don’t be surprised if it is several weeks or even months afterwards given the oversized clues that the election will be delayed or contested.
Our defensive shell had us nicely outperforming the S&P by 1.6% this week. Certainly some of that gain came from some green arrows popping up for our inverse ETFs. However, we had some other positions picking up the slack.
Now let’s review the latest and greatest insights on our portfolio positions:
The rest of the details on the portfolio are reserved for Reitmeister Total Return members.
What To Do Next?
Right now my Reitmeister Total Return portfolio has correctly been positioned for stocks to come off the September highs and head lower into the election. This has led to a more conservative portfolio mix that has nicely outperformed the past couple months.
Here is a breakdown of the 11 positions currently in the portfolio:
5 GAARP Stocks (Growth At A Reasonable Price) that are well positioned for the coronavirus economy.
3 Inverse ETFs to mop up gains as the market is likely to head lower into the election
2 Precious Metals positions because when every world government is throwing money out of a helicopter it creates a bullish environment for gold and other precious metals.
1 Stock Sector ETF of a group likely to outperform. This was added on Wednesday October 21st and already breaking higher (up 3% on Thursday…not bad for a 1X ETF).
If you would like to see the current portfolio of 11 stocks and ETFs, and be alerted of when it is time to get 100% bullish once again, then consider clicking the link below.
Wishing you a world of investment success!
…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY shares were trading at $342.75 per share on Thursday morning, up $0.02 (+0.01%). Year-to-date, SPY has gained 8.02%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...
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