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I’m so Conflicted! Or Confused?

| December 01, 2020
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First off, I hope you had a good Thanksgiving. Even though many families were not able to gather in person, hopefully you were able to see your loved ones (or perhaps you enjoyed the reprieve…I’ll leave that to you). I have awoken from my turkey-induced slumber and have quite a few thoughts bouncing around in my head, so I’ve decided to share them with you. You can decide if I’m conflicted or confused, as the title invites (warning, that might be an impossible question to ever answer).

With many states on some form of lockdown and most government health experts saying to have a socially distant holiday, why were there so many people flying somewhere for the Thanksgiving week? Ok, so it wasn’t as much of a spike as last year, but even Delta was caught short-handed and had to cancel several hundred flights. Why, you ask? Because 1,800 pilots took an early retirement package and many more are staying home because their union negotiated a partial pay in lieu of another 1,700 furloughs. So let me get this straight, you got rid of a bunch of pilots so that you could cancel flights? Got it!

 

Do I chalk this one up to conflicted or confused?

So, it’s pretty clear that if nobody goes anywhere or has any human contact, this virus can’t spread. That’s simple in concept, much more difficult in practice – as we have all learned by now. BIG news recently that the increasing number of cases in Europe have peaked (again) and have started to go down. This, on the heels of broad lockdowns in many of those countries over the last month. Apparently, the Europeans were relatively obedient.

On the other hand, this chart regarding our friendly neighbors to the north is concerning as we look ahead to the coming days:

 

So, I’m starting to piece this together in my mind. We aren’t supposed to see anybody or get close to anybody, but we still are (be honest, how many had Thanksgiving with family or friends?). Then we wonder why the cases are going up. Then the “health directors” have to clamp down by limiting the “unhealthiest” or “highest risk” places (like restaurants, in their minds). The few eateries that made it through the first shutdown and that were beginning to recover now can only operate at an even more limited capacity, and whatever they do, they must be closed by 10pm, kind of like the Gremlins (no feeding after midnight or bad things will happen). Our hats are off to those small business who are meeting these challenges head-on. The sledding is tough.

Ok, so enough with the snark and sarcasm, but I still am confused and conflicted. We still have 12.5% unemployment rate (the U-6 number).

 

Unfortunately, many of these people are in service industries like restaurants and hospitality, some of them (noted above) are getting paid to NOT work right now. I’m not sure where exactly they fit in this chart. You can see that roughly 10% of the working population is back to work, but there is still more work to be done. I already mentioned the temporary lockdowns that are occurring in many countries and states that are bound to stall or setback this recovery. Add to it that enhanced unemployment benefits expire in a month, and you have a tenuous situation at best – barring a “CARES Act: Part 2” coming down the pike soon (though do we really think it will happen before the very last minute?).

If you remember from a couple weeks ago, I said our model was moving pretty quickly and International stocks were (at the time) right behind bonds in our matrix. I can tell you that as of last Tuesday, International stocks took over second place, bumping bonds down to third. So, our model, which doesn’t explicitly know anything about a pandemic, unemployment rates, lockdowns and so on, changed to say ‘pedal to the metal’ – overweight stocks relative to all other asset classes. The markets really are looking past the current noise, despite that noise being loud and concerning. Let’s hope their crystal ball is correct. Some self-restraint, some government help, and some vaccine successes certainly would help.

Since the beginning of November here are the changes to each asset class.

US Equities +51

Int. Equities +83

Bonds -46

Cash -49

Alternatives +4

It’s clear that relative strength is pointing to stocks and not to bonds or cash. Alternatives have held in there over the last month. So, here’s where my confusion and confliction is found. On one side is a time-tested model that takes it cues from markets that look 6-9 months into the future. It points to layering on more risk. On the other side are my emotions and what I read, and these say to still stay cautious. In the end it has to come down to the old adage, “process over prediction” – remembering that the process does call for diversification between and within asset classes. Before we close, let’s look briefly at a few other data points that we find interesting (and confusing?). 

 

The leading economic indicators have rebounded nicely, but still not at the old highs.

  

The counterintuitive AAII sentiment survey clocks in with a very bullish reading. Keep in mind that when this is bullish it tends to mark short-term pauses in the market.

Last but not least, our money-flow indicator flipped defensive on us last Tuesday, just as our relative strength matrix went offensive. What are the odds? I don’t know, but all I can show you is a picture of me contemplating all the mixed messages (and yes, that’s my post-Thanksgiving body, chiseled huh? 😊).

As always, we welcome your comments and questions. Here’s to a great December. The end of a tough year. Let’s finish on a good note!

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