Stocks Up Nearly 3%; Range Trade in Light Summer Activity
May 22, 2020

In this strategy briefing…

For Wall Streeters, summer typically begins at the Memorial Holiday break, and not by the calendar. Given that we have been range trading for nearly a month now, the prospects of further meandering look relatively high, short ... – The Wall Street DebriefRead more
This week saw progress in the US on two fronts: first in healthcare (potential vaccine being developed by Moderna (MRNA) and others) and steps forward to re-open the US economy. However, a return to normalcy is ... – Tom Lee's Equity StrategyRead more
Is the Fed from Venus and the Treasury from Mars? The battle between U.S. Treasury Secretary Steve Mnuchin and Federal Reserve chairman Jerome Powell was in full view last week as the two testified before Congress. ... – Fed WatchRead more

FSInsight Investment Views

Near Term View: There is more certainty than consensus realizes, Opportunity in epicenter stocks
'20 Target: 3,450 (YE P/E 17.9x · 2021 EPS $193)
Style: High Quality

The Wall Street Debrief

Vito J. Racanelli
Formerly a Senior Writer at Barron's, where he covered stocks, bonds, and financial markets.

Stocks Up Nearly 3%; Range Trade in Light Summer Activity

For Wall Streeters, summer typically begins at the Memorial Holiday break, and not by the calendar. Given that we have been range trading for nearly a month now, the prospects of further meandering look relatively high, short of a cure for coronavirus (COVID-19). Once encouraging sign last week, was a new high by the Standard and Poor’s 500 index (SPX), that is, since the March 23 low.

Though stocks softened towards the end of the week, the SPX still managed a 3% rise since the previous Friday to 2955, and erased the previous week’s losses. A new high of 2971 was reached May 20th. Indeed, though Thursday and Friday were down days, the volume action didn’t look like a repudiation of the rise earlier in the week. The Russell 2000 index of small-capitalization companies, which tend to be sensitive to the domestic economy, soared 7% on the week.

To some extent, the future pace of the economic reopening will be meaningful, especially if there are setbacks, as the market’s 33% or so rise from March lows certainly discounts a return to some economic normality in the medium term.

Volumes dropped sharply on Friday in quiet trading ahead of the holiday break, and are likely to stay subdued, as is normal, during the summer, pace big news. Lower liquidity might have exacerbated moves in individual stocks. The SPX has effectively been trading in effectively a relatively narrow 150 point range just below 3000.

Thought the market finished higher, it was a push-me-pull-you week, with promising vaccine news and the increasing number of U.S. states that are reopening boosting prices, and deteriorating U.S.-China relations and unemployment numbers throwing cold water on the rally.

On the plus side, there was some excitement Monday occasioned by the news of a potential vaccine from Moderna (MRNA) and others, like Inovio Pharmaceuticals (INO). Unsurprisingly, the shares of both companies went up. And at this point all 50 states have relaxed some of their coronavirus restrictions, boosting hopes about an economic recovery as municipalities start to reopen.

On the other hand, shares lost some steam late in the week on new Labor Dept. data showing that about 2.4 million Americans filed for unemployment benefits in the week ending May 16. More than 38 million Americans have filed applications since mid-March, when the pandemic brought business and travel around the country to a standstill.

Perhaps worse is the escalating tensions between the U.S and China, which atter dropped its economic growth target for 2020 in the face of the coronavirus. The country also proposed a national security law that would challenge Hong Kong’s autonomy. Congress condemned the move, with senators promising an urgent push on legislation that would impose sanctions on Chinese officials and institutions involved in undermining Hong Kong. The White House also put out a paper Wednesday that effectively noted the U.S. is “willing to tolerate greater friction” with the CCP.

President Donald Trump tweeted late Wednesday night that Chinas “disinformation and propaganda attack on the United States and Europe is a disgrace. That followed Senate approval of legislation that could force Chinese companies to give up their listings on American stock exchanges.

My colleague Brian Rauscher, Head of Global Portfolio Strategy and Asset Allocation, has been hard at work digging deep into his proprietary toolkits to find more clues about where the SPX is heading and where the opportunities are. Also, he has expanded the focus outside the U.S. as many of our global/non-US clients have been asking about some interesting places to put some money to work.

Brian notes that since March 20, when key indicators flashed buy signals for the SPX, he has remained constructive and focused on the main points and conclusions below:

-Despite the possibility of tactical consolidation/pullback, we are constructive on US equities for 6-12months and are viewing tactical weakness as a buying opportunities.

-Based our research, the low for the S&P500 is in and that there is a chance the benchmark index could make new HIGHS before the year is over.

-The market is NOT extremely overvalued as some fear. In fact, our work suggests the SPX target range of 3600-4400. We still recommend a barbell approach that includes a mix of FAANG/secular growth stocks and cyclicals/value as Overweights and defense and cash as Underweights.

Like the U.S., the non-U.S. developed market universe is also seeing clear signs of healing. However, the U.S. still looks relatively stronger based on our earnings revisions work.

Questions? Contact Vito J. Racanelli at or 212 293 7137. Or go to

signature of Vito J. Racanelli
Vito J. Racanelli, Managing Director, Senior Editor and Market Intelligence Analyst

Tom Lee's Equity Strategy

Tom Lee
Previously Chief Equity Strategist at J.P. Morgan from 2007 to 2014, top-ranked by Institutional Investor every year since 1998.

Progress in the COVID-19 Battle; Opportunity in Epicenter Stocks

This week saw progress in the US on two fronts: first in healthcare (potential vaccine being developed by Moderna (MRNA) and others) and steps forward to re-open the US economy. However, a return to normalcy is more than retail openings and outdoor dining; it is as much about sports, traveling, business travel and entertainment. There will be a short-term cost to meet new compliance, and procedures initially will seem inconvenient. Over time they likely will become part of the new normal.

Daily case growth has been stubbornly flat. While there will be concerns about a second wave (which has not been evident in any nation or region opening), the consensus among health experts is that such a potential wave is probably more likely when flu season returns in the US (late Fall). More below. Nevertheless, this is progress, and perhaps better than many imagined in early March. But COVID-19 is not necessarily fading around the rest of the world, as global daily case counts are still elevated.

POINT #1: In the US, case numbers have stayed stubbornly high. Granted, part of this is an increase in testing which was >430,000 Thursday (annualizes to 150 mln tests), but it also says that prevalence in the US is just lingering. I wonder if it is realistic to expect cases to fall to zero in the US? High testing is good, but this level of testing is not really higher than Italy and COVID-19 has fallen much faster there than in the US.

NYC finally announced plans to open, by early June, slightly earlier than previous conditional comments by NYC Mayor Bill DeBlasio. NYC residents have already been increasingly venturing outside but there are real practical issues to be dealt with regarding meeting the standards of screening, sanitization and also keeping a minimal distance. So, it will be up to the ingenuity of business owners to make this happen.

Still, NYC case figures have fallen >80% from peaks. At some point, we have to wonder if NYC might simply be COVID-19 saturated. For example, some areas have a prevalence over 40%. One has to wonder if these areas have herd immunity.

POINT #2: Return to “normalcy” — Orange County approved opening plans for Universal Orlando in early June. This will be a daunting task. Universal said it will use plans based on screening, sanitization, and spacing, such as likely taking guest temperatures at all entrances and employees and visitors will be required to wear masks.

POINT #3: US is no longer the global COVID-19 epicenter, with the American case share down to ~23% from >40% on April 6. Unfortunately COVID-19 is not fading across the world. It is just proliferating in new regions. Given the US was the epicenter and all the knowledge about containment measures, it would make sense to expect other nations to fare better.

But this is not the case, as total global COVID-19 cases have been essentially flat since 4/12/2020 (98,758 worldwide) compared to 99.285 most recently. Cases are declining in Asia, Europe and North America, but it is a growing story in Latin America, Middle East and Russia. Regions seeing high case growth, measured as “daily new cases per 1mm residents,” are the Middle East and Latin America.

In the meantime, this does suggest to me that regional health security means nations will be reluctant to fully open borders. This will restrict the movement of people around the world. But will only make the US more prepared for any possible resurgence of COVID-19 in the Fall.

STRATEGY: The most recent BofA Fund Manager Survey (see nearby chart) shows high risk aversion, affirming the mountain of cash and risk appetite on the sidelines. For those not familiar, this is a great survey with 200 hedge funds and institutions participating. In the decade I have followed this survey, it has generally been accurate in positioning and tactically informative, that is, contrarian at the extreme readings, which is where we seem to be now.

202005231 Progress in the COVID 19 Battle; Opportunity in Epicenter Stocks
Source: FS Insight, BofA Fund Manager Survey

The May survey showed: Cash and Healthcare are the two most overweight (OW) trades with 1.6 and 2.5 std deviations, respectively, while Energy and Equities are the most underweight (UW) trades at -2.2 and -1.8 std deviations. I would interpret this as the plurality of survey respondents view the +30% eight-week gain in stocks since March as a “bear market” rally, hence the high levels of cash, low equity exposure and UW in Energy.

In fact, the distribution of answers regarding the shape of the recovery (markets) is: a net 75% see a U or W-shaped economic recovery (diffusion); a net 68% view the equity gains as a “bear market” rally; and a net 10% see a V-shaped recovery

Take the survey results, add in the lingering bearishness seen in AAII Retail surveys, and the $5 trillion or so in money market cash, and this tells me the ultimate contrarian bet is there is a new bull market underway. The scenario in March was dire, so investors raised cash, as did consumers from banks. If the circumstances led the world to the point of taking cash from banks, one can hardly expect this perception to have faded by May, less than 3 months later.

202005232 Progress in the COVID 19 Battle; Opportunity in Epicenter Stocks
Source: FS Insight

Opportunity in the epicenter stocks…

As I have noted in past comments, the growth stocks have already retraced much of the March decline. But the “epicenter” stocks have remained well below their February levels. So the market has not become optimistic about stocks at the center of this crisis: consumer discretionary, energy, industrial and financials. Remember, that the epi-center stocks are 27% of the market cap but are 66% of the points upside, if all stocks retrace to their Feb. highs.

The bottom line: I think the risk/reward is best in the epicenter.

Figure: Comparative matrix of risk/reward drivers in 2020
Per FS Insight

202005233 Progress in the COVID 19 Battle; Opportunity in Epicenter Stocks

Figure: FS Insight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019

202005234 Progress in the COVID 19 Battle; Opportunity in Epicenter Stocks
signature of Tom Lee
Tom Lee, Head of Research

Fed Watch

Fed, Treasury Spar Over How Much COVID-19 Relief Needed

Is the Fed from Venus and the Treasury from Mars?

The battle between U.S. Treasury Secretary Steve Mnuchin and Federal Reserve chairman Jerome Powell was in full view last week as the two testified before Congress. The two offered different visions about the U.S. economic outlook, with the Administration—facing an election in a few months—offering a more upbeat view of a “V”-shaped recover, unsurprisingly.

Basically, the Treasury offered a more hesitant approach to new federal aid while Powell again suggested that more relief would be needed, given his much less sanguine view of how long it will take the country to emerge from the coronavirus induced shutdown. This too should be no surprise, as the Fed can effectively print money while the Treasury has to go out and raise it and then convince the taxpayers to pay for it. For example, the Treasury seeks to borrow $3 trillion in the second quarter to help finance the aid that Congress has passed.

These differences reflect the Administration’s belief (which I agree) that the biggest danger to the economy is waiting too long to restart activity after two months in which millions of Americans have sheltered in their homes to slow the spread of infections and many millions have lost their jobs. The President has said that he wants to wait and see about how the economy does before providing more aid to businesses, households and state and local governments. House Democrats approved a $3 trillion relief package last week. It likely won’t pass in the Senate. For more see page 11.

Powell once again suggested additional spending from Washington could be needed to prevent long-term damage from high unemployment and waves of bankruptcies. The Fed doesn’t see the economic rebound that the Administration does and is concerned the relief measures so far might not be sufficient to help bring the economy out of the coronavirus shock, even with interest rates at zero, effectively. The Fed believes that allowing businesses to reopen without slowing the spread of the virus risks making the economy worse.

Separately, the minutes from the April Federal Open Market Committee were released and the most important nugget was that the Fed is discussing the difficulty officials could face in boosting growth when rates are effectively zero. In 2019, officials conducted a policy review to plan for such a scenario, and the minutes said that review was on track to be completed later this year.

Fed staff economists laid out a baseline scenario in which restrictions on social interactions would gradually ease, boosting economic growth and reducing unemployment. But they also said their more pessimistic projection was no less plausible than the baseline forecast.”

Even after social-distancing restrictions end, some business models “may no longer be economically viable,” Fed officials said, and spending in sectors such as entertainment and travel that demand greater human interaction could remain weak. The minutes also said that greater fiscal support might be necessary if the downturn persists. Once again there was no discussion of negative interest rates.

The yield on the benchmark 10-year U.S. Treasury note was 0.66% vs 0.64% one week previous.

Upcoming FOMC meeting on June 9-10.

GRANNY SHOTS: Best bets in 2020

GRANNY SHOTS: Best bets in 2020 - Week 21

Below we’ve highlighted stocks that we recommend across at least two of our investment strategies for 2020. These companies could benefit from multiple themes and secular tailwinds – clear picks in our view for the first half of 2020.

Figure: Granny Shots are the “best of the best”
Stocks which appear in multiple themes. Source: FS Insight

202005231 2 GRANNY SHOTS: Best bets in 2020   Week 21

Figure: Granny Shots Portfolio Performance
Monthly. Source: FS Insight. FactSet as of 05/21/20.

202005232 1 GRANNY SHOTS: Best bets in 2020   Week 21

Figure: Intersection of investment recommendations by strategy
As of 05/21/20, source: FS Insight, FactSet

202005233 1 GRANNY SHOTS: Best bets in 2020   Week 21

The stocks in the Granny Shots portfolio collectively outperformed the S&P 500 by 2070 bps since its inception (S&P 500 is up 13.6% during the same period).

Technical Strategy

Robert Sluymer
Former Managing Director leading RBC’s U.S. Technical Research team with over 26 years of expertise in investment research and technical analysis.

Expect Shallow, Short Pullbacks; JB Hunt Stock Looks Attractive

Any investor with a passing interest in technical analysis is likely focused on how the Standard & Poor’s 500 index (SPX) will react to its declining 200-day moving average (Dma) just below 3000. A pullback or pause near current levels would not be surprising, but my technical outlook remains unchanged, and I would continue to caution investors from turning too bearish.

Of course, I can appreciate the reasons many investors are bearish technically and fundamentally, but I also continue to see technical evidence pointing to a broader recovery. The SPX remains well above its 200-week moving average and the 50-day moving average just turned up over the past week, after turning negative in late February. Overall I continue to expect pullbacks to be shallow and short lived.

Growth stocks have certainly rallied a long way with many stocks now well advanced and vulnerable to profit taking. However, it is the behavior of cyclicals that is the noteworthy technical development. Last week, I highlighted that cyclicals were at an important inflection point and potentially establishing retests of their March lows featuring financials as an example.

The past weeks rebound in cyclicals has reinforced this thesis with the technical backdrop incrementally improving. For example, weekly momentum indicators, which are helpful tracking 1-2 quarter shifts, are increasingly turning up from deeply oversold levels across more cyclical groups. Secondly, daily momentum indicators, tracking 2-4 week shifts, are also turning up but at a higher level than that which developed in March.

202005231 3 Expect Shallow, Short Pullbacks; JB Hunt Stock Looks Attractive

This pattern of higher short-term momentum lows is an almost textbook behavior that develops as part of a broader intermediate-term bottom. Lastly, one by one, cyclical subindustry groups are beginning to reverse their multi-month downtrends.

The bottom line is my technical view, along with colleagues Tom Lee and Brian Rauscher, support adding more cyclicality to portfolios. I feature trucker J.B. Hunt Transport Services (JBHT) this week as an example of a cyclical stock early in a second leg up after pulling back in April.

Figure: Weekly Sector Review
Source: FS Insight, Factset

202005232 2 Expect Shallow, Short Pullbacks; JB Hunt Stock Looks Attractive

Figure: Best and worst performance sectors over past 3 months

202005233 2 Expect Shallow, Short Pullbacks; JB Hunt Stock Looks Attractive
signature of Robert Sluymer
Robert Sluymer, Managing Director and Technical Strategist

US Policy

L . Thomas Block
Formerly Global Head of Government Relations at J.P. Morgan for 21 years, and previously served as Legislative Assistant and Chief of Staff in the House, and Legislative Staff Director in the Senate.

House, Senate Stalemate over Next Round of Coronavirus Relief

With Congress leaving town for Memorial Day, the House or Representatives and the Senate remain at loggerheads over if, when and how to proceed with the next round of coronavirus relief. Last week the Democratic-controlled House passed a $3 trillion package but it arrived at the Senate with a thud as Senate Majority Leader Mitch McConnell and the President showed no interest in proceeding with the House bill. McConnell said further legislative action was on hold and that the House bill was dead on arrival. President Trump declared he’d veto the bill.

As the Senators left town last week, policy disagreements were brewing within the Republican conference as the unemployment numbers leveled out at over 2 million new claims a week. Of the 35 Senate seats being contested this year, 23 are currently held by Republicans.

Susan Collins of Maine and Cory Gardner of Colorado always knew they would have tight races as they are the only two of the 23 Republicans from states that Hilary Clinton carried in the previous election. Recent polling is showing close races for Republicans in Arizona, Montana, North Carolina and Iowa. Republican incumbents in these states are reportedly putting pressure on leadership to start work on virus relief legislation in June.

My view is that some relief bill will pass before the July 4 break. While structuring aid to state and local government will need to be carefully crafted, and assistance to the U.S. Post Office could be contentious with the battle over mail-in ballots; the Senate is near a compromise to give more time for small business to spend their Paycheck Protection Program money. There is also support in the Senate to look at another round of individual stimulus check.

A major issue of contention is over the extension of the $600 a week unemployment supplement that expires at the end of July. Critics of the unemployment benefit point out that in some cases it pays more than some service jobs and could delay opening the economy. Much will depend on what the Senators hear back in their home states over the Memorial holiday break.

Figure: Top Trump Tweets

202005231 4 House, Senate Stalemate over Next Round of Coronavirus Relief
signature of L . Thomas Block
L . Thomas Block, Washington Policy Strategist
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