The 2020 Boom

It was one heck of a roller coaster ride on Wednesday. In a blink of an eye, the market zoomed higher, plunged, and took off again. 

Those screams you’re hearing are mostly the boo-birds, naysayers, and politically motivated bears that only want this market to crash because of the occupant of the White House.

The scripts haven’t changed much in the past couple of years - just the ‘magic words’ inserted to trigger panic:

• Constitutional crisis
• Trade war
• Recession
• Iran & war
• Coronavirus

There is no focus on data (soft or hard), and earnings are barely mentioned without any nuance to guidance and wider implications.

The questions always include the ‘magic words’ and when brushed off, those questions are asked again until a headline comes out of the interview that justifies the initial fear and makes it an even bigger headline. 

Well, that might work for some, but the market eventually shakes off emotions and defaults back to fundamentals. That’s what’s happening this week, as a series of reports paint a picture of an economy that could support a much higher stock market.

The Message of the Market

Investors are searching for opportunities, which means even when big momentum names stumble, buyers emerge in other areas, including semiconductors in Technology.  Energy was also a big winner yesterday, but I’m not taking that bait for now. Instead, I think investors need exposure to Industrials and Materials in addition to those names whose underlying fundamentals are always rapidly improving.

The 2020 Boom! The major indices are all back in the plus column and hitting record highs:

S&P 500: +3.2%

• Dow Jones Industrial Average: +2.6%
• NASDAQ Composite: +6.0%
• S&P 500: 71 new highs, 0 new lows
• NASDAQ: 127 new highs, 28 new lows

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Service Economy Looks Great

Yesterday was a hectic day. I didn’t get a chance to delve into the Institute of Supply Management (ISM) Non-Manufacturing (services) number, which came in better than expected:

• Headline: 55.5 +0.6
• Business Activity: 60.9 +3.9                    
• New Orders: 56.2 +0.9
• Employment: 53.1 -1.7

Finding workers is by far the biggest problem while the only mention of coronavirus was about a run on supplies. Here are some observations from responders:

• “Outlook remains favorable for growth in 2020. Pricing on goods and services [are] stable, with little to no pricing escalations expected for the remainder of the first quarter, except for seasonal- and trade/tariff-related impacts on food products.” (Accommodation & Food Services)
• “Q1 sales are improving, which makes us more optimistic.” (Construction)
• “Cautious start to 2020. Looking forward with optimism and encouragement. Conditions are favorable.” (Finance & Insurance)
• “Closely monitoring China’s coronavirus and its potential impact on medical supplies like surgical masks and protective goggles.” (Health Care & Social Assistance)
• “The labor market continues to be a challenge, impacting capacity and pushing up costs. Despite this, overall business volume remains positive, with growth in key sectors for our business.” (Management of Companies & Support Services)
• “The oil and gas industry is off to a slow start in 2020, as oil prices dropped slightly to start the year. Several notable oil and gas companies announced layoffs in the first week of January 2020.” (Professional, Scientific & Technical Services)
• “Customer inquiries are strong to start the new year.” (Real Estate, Rental & Leasing)

Portfolio Approach                   

The model portfolio mix remains the same. We took profits on a Consumer Discretionary name that had become too volatile and replaced it with an old value idea that’s looking to transition into a new growth model.