All Bulled Up

By David Nelson, CFA CMT

Markets pushed higher last week but clearly most of the economic data was soft. Jobless claims, Consumer Confidence and CPI all came in short of expectations. Earnings reports continue to be robust and well above estimates, but we’ve seen this movie before. A combination of lowered expectations and analysts behind the curve set the stage for large earnings beats across the board. While the headline numbers are always important post earning’s stock performance has largely been driven by management commentary and what the business model looked like on the other side of a vaccine rollout.

Jobless Claims 15 Years

The economic damage from the pandemic is still with us and continues to challenge our ability to get back to pre-covid economic activity. Thursday’s jobless claims at 793k still dwarf the highest levels of the Financial Crisis.

The chart below from the New York Times gives us a state by state breakdown of vaccine distribution and just how much of the nation has received 1 shot. I’m scheduled to receive my first Pfizer shot in early March. Information on just how much of the population needs to be vaccinated to achieve herd immunity appears vague. Even the CDC’s own website seems to punt on this important data point saying it’s under study.

Vaccine Rollout State by State

The long end of the yield curve continues to push higher with 10-year rates breaching 1.20% and little resistance up to what looks like a  2% magnet. Without question COVID-19 fundamentals continue to be the driving force behind equity returns but make no mistake at some point these rates are going to matter.

10-Year Yields – Two Year Chart

Each step higher demands a continued rise in earnings growth and with-it GDP especially with the dividend yield for the S&P 500 at just 1.51%

All Bulled Up

2021 is only 6 weeks old and already we’ve had one major spike in the VIX that disappeared as fast as it surfaced. On a one-year chart a VIX level under 20 looks benign but when we expand the chart out to 5 years, we get a different picture.

VIX 5 Years

The following isn’t quantitative but a subjective observation that professional and retail investors are all bulled up but ready to pull the rip cord at the first sign of trouble. 

While Fed watchers will parse every word of the FOMC minutes Wednesday I still think the Thursday’s unemployment claims rank high on any list of market moving data. This is where we should see the first real economic evidence the vaccine rollout is altering the course of the economy.