If you flipped on any news network yesterday, or headed over to their websites today, I guarantee you that all the headlines you saw consisted mostly of one word…Impeachment.“Trump Is Impeached, Again,” blared headlines in unison from the New York Times, the Washington Post,Bloomberg, and CNN.MSNBC opted to talk about how Trump “made history.”Fox News, having recently rediscovered subtlety, naturally chose a quieter tone.And with it came all the histrionic modifiers to which by now we’ve grown accustomed — exaggeratory words like “unprecedented,” “stunning,” and “disastrous.”Those kinds of “tape bombs” tend to push markets around. And they did just that yesterday, sending the S&P 500 down almost 25 handles in the span of a few hours.Source: BloombergNow, I don’t want to imply that the moment wasn’t historic — it had literally never happened before. And I’m also not suggesting that it bears no consequence — I take treason seriously.But almost every headline that has hit the market since last summer ultimately turned out to be a big, fat nothingburger.And this former baseball player was trained a long time ago to keep my eye on the ball… you can’t get distracted by crowd noise.Because like major league heaters, markets move pretty fast… and if you blink, you might miss one coming right down the middle.Sure enough, as soon as markets opened in Asia, it was back off to the races.Source: BloombergAnd by the time I sat down at the desk this morning, the market was already pushing back toward all-time highs.
Digging into The Noise
It’s not exactly a secret why the stock market has continued to do this for the past six months… in fact, I can boil it down to one chart.Source: FRED, Seawolf ResearchThe Federal Reserve’s money printer has provided nearly every bit of financing the country has asked for, and it’s not about to stop. In fact, with Janet Yellen — herself an ex-Chairperson of the Federal Reserve — at the helm of the US Treasury, coordination between the two entities is likely to increase rather than the other way around.Moreover, the economic advisors with whom President-elect Joe Biden has been consulting since last summer include several prominent proponents of Modern Monetary Theory, which my Venture Society colleague Marin Katusa discussed in an article all the way back in September. To give you an idea about how enthusiastic these folks are about government spending, Stephanie Kelton — essentially the face of MMT today — tweeted this out once it was clear that Democrats were going to take the Senate.Source: TwitterI’d say that sends a clear message.Now, it’s 100% clear that we need some kind of aid. The employment data that came in this morning was shockingly bad, with initial jobless claims nearly touching one million for the first time since last August.Source: Bloomberg“Pandemic Under Assistance” claims rose by 123,000 as well, bringing total new claims to the highest level in more than a quarter.Source: Oxford Economics/Haver AnalyticsAnd the overarching worry here as COVID-19 case numbers continue to increase is that unemployment is actually going to get worse before it gets better.Source: Bloomberg, Johns HopkinsLooking back at last year’s data in the chart above, we really didn’t see a slowdown in case numbers until the weather warmed up in the back half of April and early May.And just looking at mobility data, it’s clear that the engine that drives our economy — consumer spending — remains well below last year’s pace.Source: GoogleNow, there’s a chance that the country’s Q1 Gross Domestic Product may come close to last year’s figures, as our biggest cities are unlikely to issue restrictions to the same intense degree they did last March.And for that matter, Q2 GDP will be incredibly easy to top this year, as the bar is set incredibly low.Source: GoogleSo for now, the noise generated by government spending continues, and we are forced to ride the wave. Especially with stimulus coming, market momentum is likely to keep pace throughout the first half of the year.The easiest way to track that performance is through the iShares MSCI USA Momentum Factor ETF (BATS: MTUM), and given that today was a down day, picking up a ¼ stake here makes sense.
Searching for A Signal
All that said, if unemployment continues to be persistent — and most analysts project that to be the case — the year-on-year comparisons will get increasingly difficult to make as the year goes on.Sometime in the back half of the year, the economy is likely to slip back into a back-to-back recession similar to 1980 and 1982, in the early portion of Ronald Reagan’s term.Source: FREDDuring that period, Fed Chair Paul Volcker was forced to raise interest rates repeatedly to tamp out inflationary pressures inherited from Presidential predecessors Nixon, Ford, and Carter.Should that happen this time around — less than a year removed from issuing the most debt in US history and just months behind another giant spending spree — the consequences would be dire.Although still small on an absolute basis, interest rates for the 10-year Treasury have more than doubled since early August and continue to push upward.Source: Stockcharts.comAnd as I mentioned yesterday, we’re already starting to see inflation show up in commodity markets, with lumber up 38%, iron ore and steel up over 30%, nickel up 20%, gasoline up 20%, oil up 14%, corn, soybeans, wheat and milk all up over 10%, and copper up 6%.Source: BloombergSo, we have to pay attention to all these things starting around April/May. If economic data improves for any reason — vaccine-related or otherwise — it’ll be obvious.Because unlike the white noise created by the constant whir of money printers, economic crises tend to make loud noises.All the best,Matt Warder
