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Before we get to our weekly review of the stock market's fundamental backdrop, there are two important news items to take in - both of which can be viewed from a macro/fundamental lens.

First there is the headline that the President and First Lady both have tested positive for Coronavirus. Although the word out of the White House is both are well, the New York Times is reporting the President is showing mild symptoms.

Stock futures fell overnight on the news as uncertainty over the functioning of the U.S. Government and the election has suddenly spiked. And we all know how the market hates uncertainty. Not surprisingly, stocks have opened lower and a "risk-off" mood seems to be developing. This is certainly understandable since it now appears there is what traders like to call "weekend headline risk" in the mix here.

From a macro point of view, the fact that the President has now contracted the virus puts the state of the health crisis back on the front page. While most everyone would prefer to think that we are rounding the corner on this thing and that it will soon be in the rearview mirror, the simple fact of the matter is that health experts continue to tell us that COVID-19 remains a serious problem - both in terms of health and economic risks.

Which brings us to the second news item of the morning: The Jobs report. The headline is the economy created 661,000 new jobs during the month of September and the unemployment rate fell to 7.9%. The good news is the unemployment print was ahead of the consensus estimate for a rate of 8.2% and August's reading of 8.4%.

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The bad news is (a) the number of new jobs created last month was well below expectations, and (b) after what is being touted as a V-shaped rebound, the economy has recovered only 11.4 million of the 22 million jobs lost in March and April. So, as the chart below illustrates, full recovery remains far away.

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For those keeping score at home, September's new jobs total was the first time since April that net hiring was below 1 million. So, again, I think it is important to keep in mind that job growth is s-l-o-w-i-n-g and that meaningful growth from here could be challenging until a vaccine is widely distributed.

My apologies for the Negative Nancy tone here, but one of the nagging issues in the back of my head during the second half of this year has been the massive level of unemployment. While the popular thinking is that all those jobs lost will eventually return, I've read numerous research reports suggesting that they won't. And from my seat, this could become a major impediment to the economy returning to pre-COVID levels.

As such, traders can't be blamed if they start to curb their enthusiasm. For me, today's headlines support the idea that the stock market remains in a consolidation phase. Therefore, I'm not going to be surprised if stocks continue to trade in a wide range and with an elevated level of daily volatility for the next month or so.

Now let's check in on our Fundamental Factors indicator board...

The State of the Fundamental Models

There are no changes to the Fundamental Factors board again this week. To review, Monetary conditions remain positive and supportive, the economic composite is holding steady, earnings remain negative but are starting to tick higher from the post-COVID lows, inflation remains something to watch, and valuations remain at extremely high levels. All in, my view is the board continues to favor the bulls from a big-picture, intermediate- to long-term standpoint.

* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability - NOT INDIVIDUAL INVESTMENT ADVICE.

Thought For The Day:

Expectations are the root of all heartache. -Shakespeare

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research


At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.

Fundamental Models Explained

Monetary Composite: The popular cliche, "Don't fight the Fed" is really a testament to the profound impact that interest rates and Fed policy have on the market. It is a proven fact that monetary conditions are one of the most powerful influences on the direction of stock prices. The Monetary Composite is a combination of two proprietary monetary models developed by Ned Davis Research. The first is comprised of 14 indicators and is plotted as a composite and the second is made up of eight monetary-related indicators including money supply, and the bond and commodities markets.

Economic Composite: During the middle of bull and bear markets, understanding the overall health of the economy and how it impacts the stock market is one of the few truly logical aspects of the stock market. The economic composite is a series of three models designed to indicate the current state of the economy.

Earnings Composite: A series of four models designed to indicate the overall health of corporate earnings. The first model is based on the slope of the smoothed S&P 500 earnings per share. The second model looks at the drivers of earnings and includes indicators such as U.S. industrial production, the CRB Spot Raw Industrial Material Price Index, the Treasury yield curve, Institute for Supply Management (ISM) indices, corporate bond credit spreads, unemployment claims, and the trend in analyst earnings estimate revisions for the S&P 500. The third model is designed to indicate the likely trend in the earnings per share reported for the S&P 500 Index. This model uses a variety of macro variables to indicate whether current conditions are favorable for strong, moderate, or weak growth in S&P 500 earnings. The fourth model the median 12-month percent change in the one-year analyst forecast out of the 500 components of the index.

Inflation Model: From an historical perspective, one of the best "big picture" indicators of what the market is expected to do next is inflation. The Inflation model is designed to identify cyclical changes in the rate of inflation. The model consists of 22 individual indicators primarily measuring various rates of change of such indicators as commodity prices, the Consumer Price Index (CPI), producer prices, and industrial production.

Valuation Composite: If you want to get analysts really riled up, you need only to begin a discussion of market valuation. While the question of whether stocks are overvalued or undervalued appears to be a simple one, the subject is actually extremely complex. The Valuation composite consists of five valuation indicators/models developed by Ned Davis Research. The first valuation indicator reviews the S&P 500 Price-to-Earnings GAAP Ratio relative to normal, expensive, and bargain valuation zones. The second model measures the S&P 500’s Median P/E ratio, representing the median P/E of the 500 stocks in the index. The third model measures the Median P/E ratio of a multi-cap stock index. The fourth indicator is the P/E ratio of the Value Line Index. The fifth model is a composite of 7 indicators designed to reflect stock market valuations based on how various valuation indicators compare to their latest 10-year historical ranges.

NOT INVESTMENT ADVICE. The opinions and forecasts expressed herein are those of Mr. David Moenning and Heritage Capital Research and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

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The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

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