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November 23, 2020 – Market Update Table of Contents

I. Stocks A. Barron’s Summary (Barron’s) (Barron’s) B. Other Stories About Stocks

II. Bonds and Interest Rates

III. The Economy A. COVID B. The Fed C. Judy Shelton D. Jobs and Benefits E. Education F. Other Economic Indicators and Economic News

IV. Politics

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I. Stocks

A. Barron’s Summary (Barron’s) (Barron’s) 1. Last week: DJIA -.7%; S&P 500 -.8%; Nasdaq +.2%; Russell 2000 +2.4% a. Market being saved by good vaccine news i. Moderna’s preliminary data shows 94.5% efficacy rate ii. AstraZeneca said their vaccine was safe and seems to work w/ older adults iii. Pfizer’s full data shows 95% efficacy rate 1. Asked FDA for an emergency use authorization 2. Could have been a much worse week: a. Economic data disappointed i. Retail sales increased just .3% in Oct (forecast .5%) ii. Jobless claims increased 31K to 742K iii. Philadelphia Fed and Empire State manufacturing indexes disappointed iv. JPM forecasting economic contraction in 2021 Q1 b. Covid cases spiked i. 73% increase to 187K ii. 1,962 deaths on Nov. 19 c. Treasury Dep’t said it would let five of Fed’s special lending facilities expire at year end d. Ratio of insider sales to insider purchases increased to 58 to 1 i. Gartman calls this “stunningly high and consistent w/ interim peaks” 3. Greatest future risk may be disruption in distribution of vaccine 4. Still have long-term issues: a. An uneven economic recovery b. Climate change c. Deep political divisions 5. We’re seeing widespread bullishness a. BAC’s survey of portfolio managers showed: i. They anticipate strongest profit performance in 20 years ii. Boosting equity allocations to greatest overweighting since Jan. 2018 iii. Cut cash holdings to lowest levels since April 15 b. Investor’s Intelligence found that 59.6% of advisors it polled were bullish i. Up from 59.2% in previous reading ii. Bears fell from 19.4% to 182% iii. The 40%+ spread between bulls and bears tends to be seen at market tops 6. Seeing signs of speculation: a. Tesla up 20% for week – after being added to S&P 500 b. Bitcoin rose a similar amount i. $18K is 3X March low c. Junk bonds yielding less than 5% d. Money flowing out of gold ETFs

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B. Other Stories About Stocks

Strength of market – crushing the shortsellers (Bloomberg) 1. Despite lots of reasons to be bearish, short sellers are getting killed. 2. Some of the data: a. Currently, this is the fifth best November on record. b. Fewer than 50 stocks in the S&P 500 have fallen this month and 98% are higher since March 23. c. The Russell 2000 is up 16% in 15 trading days and value stocks are reviving. d. A GS basked of “most-shorted” stocks is up 19% this month (and 27% YTD). e. Bears are giving up – the median S&P 500 stock had outstanding short interest accounting for just 1.6% of market cap, the lowest level since at least 2004. 3. Signs of exuberance: a. BAC is showing that fund managers are the most optimistic that they’ve been since Jan. 2018. b. The Investment Company Institute shows that mutual funds and ETFs had $20B of inflows from Nov. 5 – 11, the largest in four years. 4. Even the Treasury-Fed spat didn’t push the market down. a. Maybe the message from the spat is that the Fed is unlikely to turn off the spigot and this is great news.

Markets and a dark winter (Bloomberg) 1. Markets often look through bad news in the present for good news in the future. a. But, if the future good news is priced in, bad news in the present can derail the market. 2. The tremendous number of Covid cases will cause terrible suffering prior to the widespread distribution of the vaccine. a. NY is closing their schools (impacting NY traders). b. Around 12MM Americans will lose their emergency unemployment benefits by year-end. i. This includes 9.4MM on PUA and 4.1MM on PEUC. ii. Realize that the government didn’t let extended unemployment benefits during the Great Financial Crisis expire until the end of 2013 – and that affected 1.3MM people.

Small caps have started doing well (WSJ) 1. Russell 2000 is up 4.5% this year, vs. 11% for S&P 500 and 32% for Nasdaq. a. Since Pfizer news, Russell has beaten Nasdaq by 8.52% -- greatest margin since 1986. b. Also helped by Biden – greater stimulus. 2. In the short-term, the risk is that more lockdowns will hurt the small-caps.

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Momentum is hurt by rotation (WSJ) 1. Momentum funds were hurt by vaccine news. 2. Momentum funds typically do well until there’s a turning point. 3. Performance is also hurt when turning points are short-lived.

Tesla will be added to the S&P 500 (WSJ) 1. Tesla is going to be added to the S&P 500 on Dec. 21. 2. Inclusion requires four consecutive quarters of profit. a. Tesla has strung five together. b. The company has posted a profit in the first three quarters of 2020. c. Tesla’s Q3 profit of $331MM was helped by $397MM in regulatory credits. 3. Tesla’s shares jumped 14% on the news.

Tesla and indexing (WSJ) 1. There is ~$11T indexed to the S&P 500. 2. The company has a $400B market cap and it will be one of the ten largest companies in the index. 3. S&P is considering adding Tesla in two tranches so that it does not disrupt the markets.

Tesla – is inclusion a bad sign? (Bloomberg) 1. Yahoo found its way into the index in Dec. 1999, four months before the collapse of internet stocks. a. Real estate stocks were added shortly before the subprime crisis. 2. Tesla is trading at 113X earnings and 49.5X EBITDA. a. Tesla produced $556MM of income over the past 12 months. b. If they got to $10B of income and sold for 20X earnings, the market cap would be cut in half.

Airbnb is going public (WSJ) 1. Planning to go public in mid-December a. Doing a traditional IPO (had considered a direct listing) b. Nasdaq ticker: ABNB c. Underwriting is being led by Morgan Stanley and Goldman Sachs d. Employees will be allowed to sell up to 15% of their shares 2. Expected to have a market cap of $30B (had been $31B in 2017; had been $18B earlier this year) 3. Key financial data: a. 4MM hosts i. 7.4MM+ listings of home rentals b. Revenues in Q2 were 72% lower YOY; but Q3 revenue was down just 18% YOY (with $219MM profit) c. Accumulated losses since 2008 founding: $2.1B through Sep. 30 4. Risks for Airbnb: a. Pandemic b. Zoning restrictions on short-term rentals c. Difficulty policing crime sandyleeds.com 4

II. Bonds and Interest Rates

Treasuries: Higher real rates, lower breakeven inflation, and a higher term premium (WSJ) (WSJ) 1. Breakeven inflation (10-year UST yield – 10-year TIPs yield) has dropped a bit: a. August: 1.796% (.692 - -1.104) b. November: 1.722% (.88 - -.842) 2. Treasury yields have been a bit higher even though no one is predicting that the Fed is going to be raising rates soon. a. This means that the term premium (the extra compensation that you need for holding a longer-term bond) is increasing. b. In this case, it means that the term premium is becoming less negative (and just recently positive) according to the NY Fed model.

Real yields on investment grade bonds are low (WSJ) 1. Real yields on investment grade bonds are ~.2% and this is pushing investors out the risk continuum into junk bonds. 2. Junk bonds are now trading at a 4.27% spread to Treasuries. a. Junk bonds have also been helped by promises of a vaccine.

Some Chinese AAA corporate bonds have defaulted (WSJ) 1. In China, approximately half of onshore corporate bonds are rated AAA (compared to just MSFT and JNJ in the US). a. The main explanation in China is government support. 2. But recently, several companies owned by local governments defaulted. a. Even more disturbing was the fact that key assets were moved out of the defaulting companies prior to the default.

Alternatives to the 60/40 portfolio? (Barron’s) There continues to be concern that a 60/40 portfolio does not offer much return going forward (given that bond yields are so low)

1. Equity valuations and bond prices are high (low yields) a. And higher yields could push P/Es down 2. Possible solutions (none of them great): a. Hedge stocks with out-of-favor sectors i. Value stocks, financials, industrials, small-caps b. Substitute gold or TIPs for traditional bonds i. Could benefit from negative real rates of interest c. Incorporate more equity-like bonds and bond-like stocks i. High-yield bonds, convertible bonds, REITs, utilities

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III. The Economy A. COVID

U.S cases are rising (Johns Hopkins) 1. The U.S. has had more than 12.1MM cases and ~256K deaths a. Globally, there have been 58MM cases and ~1.4MM deaths 2. On Nov. 20th, we had 192K new cases (CDC)

CDC says we shouldn’t travel (WSJ) 1. The CDC urged Americans to not travel for Thanksgiving. 2. It took 96 days in the spring for the US to log 1MM cases (we did have less testing), but we logged another million cases between Nov. 5 and 13.

Moderna’s vaccine: 94.5% effective (WSJ) 1. Moderna’s vaccine is 94.5% effective at protecting people from Covid according to early studies. a. Of the 95 people who got the virus, 90 of them had the placebo. 2. When vaccines are distributed, it is expected that the first doses will be given to front-line workers. a. Then, people at higher risk (including older people) will receive the vaccine.

Some companies received benefits and failed (WSJ) 1. Approximately 300 companies that received as much as half a billion dollars (each) in pandemic-related government loans have filed for bankruptcy. a. They employed a total of 23,400 workers. b. These 300 companies received between $228MM and $509MM. c. The funds from the Paycheck Protection Program weren’t enough to keep them going. 2. Big borrowers were 13.5% of the total participants but accounted for ~1/2 of the loans. a. The government awarded $525B in PPP loans to 5.2MM companies. 3. SL: $500MM is .1% of the $525B loaned…should this be such a big story?

Vaccine stocks don’t all do well (WSJ) Pfizer’s stock is down for the year. A few reasons:

1. Pharmaceuticals are treated as defensive due to their reliable sales 2. Vaccines may not be recurring revenue (if immunization lasts) 3. Vaccines are competing with each other

Women have been disproportionately impacted by Covid (Project Syndicate) Covid has impacted women disproportionately:

1. More front-line healthcare workers 2. Lapses in maternity care 3. Increase in domestic abuse 4. Women have lost more jobs (b/c women dominate the service sector) 5. Homeschooling responsibilities have fallen on women sandyleeds.com 6

B. The Fed

Powell’s warnings (WSJ) 1. Fed Chair Powell said that the spread of Covid is “the near-term risk that we’re most focused on.” a. There is concern that people will lose confidence in efforts to control the pandemic. 2. Powell also said that it would be premature to wind down the lending programs.

Clarida calling for more accommodation (WSJ) 1. Fed Vice-Chair Richard Clarida said that we’d need more fiscal and monetary support to ensure a strong recovery. 2. Clarida said that the Fed could make QE more accommodative by increasing the share of long-term securities that they’re buying.

The Fed and Treasury aren’t getting along any more (Bloomberg) 1. Treasury Secretary Mnuchin said that he would let certain emergency lending facilities created by the CARES expire on Dec. 31. a. He requested that the Fed return almost $200B of unused funds to the Treasury. 2. The Fed responded with a statement saying that they would prefer that the full suite of emergency facilities remain. 3. At stake is the future of the Municipal Liquidity Facility, the Main Street Lending Program, the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility and the Term Asset-Backed Securities Loan Facility. 4. By contrast, Mnuchin requested a 90-day extension of the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, the Money Market Liquidity Facility and the Payroll Protection Program Liquidity Facility.

Is the spat political? (WSJ) 1. It will be difficult for the next Treasury secretary to re-start these programs if the money is returned to the Treasury. 2. There is a general belief that this is a politicization of market-stabilization policy. a. Republicans fear that the Fed would engage in spending decisions that should be made by Congress.

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C. Judy Shelton

Senator John Kennedy – have his views changed? (WSJ) 1. Republican Senator John Kennedy (Louisiana) said after Shelton’s February hearing, “Nobody wants anybody on the Federal Reserve that has a fatal attraction to nutty ideas. Now I’m not saying that’s the case here, but that was sort of the dialectic going on.” 2. Kennedy now supports Shelton.

Lamar Alexander won’t support Shelton (WSJ) 1. Republican Senator Lamar Alexander said he wouldn’t support Judy Shelton. a. He said that he was not convinced that she supports the independence of the Fed as much as governors should. b. Republican Senators Mitt Romney and Susan Collins have already said that they won’t support Shelton. 2. If everyone were voting, this would result in a 50-50 vote (broken by VP Pence). a. But, Republican Senators Rick Scott (FL) and Grassley (Iowa) are quarantining after testing positive for the virus. 3. In addition, Arizona’s Senator-elect Mark Kelly (Democrat) will be seated as early as Nov. 30th and this would make it impossible to confirm Shelton if none of the three Republicans changed their vote.

Why Republicans favor Shelton now (Bloomberg) 1. Shelton’s nomination has gone nowhere until after the election. a. Senate Republicans have repeatedly resisted nominees who deviate too far from party orthodoxy. 2. Now, the Republicans see her as taking away a spot for Biden to fill. 3. Talking about McConnell and the Republicans, Jonathan Bernstein wrote, “his (and their) sudden embrace of a nominee for the Fed Board whom they previously regarded as a kook – just in order to prevent Biden from having a vacancy – suggests that’s the direction we’re headed if McConnell is still the majority leader in the next Congress.”

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D. Jobs and Benefits

The Virus is Surging. Growth is Slowing. And Millions are About to Lose Jobless Benefits. (Barron’s) (WSJ) 1. Millions of workers will stop getting jobless benefits in just five weeks a. Will hurt more than just those unemployed people i. Will hurt consumer spending and business profitability 2. States and territories offer only 12 – 26 weeks of benefits with possibility of up to 20 additional weeks when local jobless rate is high a. Plenty of time to find a job when national economy is doing well b. But, it can take years to return to a decent job market after a downturn hits i. This is why Congress created programs in past to extend benefits 1. 1982 – 85, 1991 – 94, 2002 – 04, and 2008 – 13 c. GS predicts that we’ll only reach full employment by 2024 3. Economists at the Univ. of California’s California Policy Lab estimate that 80% of initial jobless claims in the state now come from people who have already been unemployed at least once this year a. The number of people filing for the first time is back to pre-pandemic levels 4. Two big federal programs are set to expire on or before December 31: a. The number of Americans receiving Pandemic Emergency Unemployment Compensation (PEUC) has soared to more than 4MM by the end of October from under 1MM in July i. But, the PEUC adds only 13 weeks to normal state programs b. Pandemic Unemployment Assistance (PUA) lasts 39 – 46 weeks i. To help freelancers, contractors, etc. 5. One study estimates that: a. ~3.5MM Americans are set to exhaust PEUC over the next few weeks i. With an additional 4.7MM at risk due to the hard calendar cutoff ii. About 2.5MM of the 8MM losing PEUC benefits may still be able to get regular extended benefits (from states) 1. But this won’t last long enough to tide workers over to a normal economy b. As many as 8.3MM (the number is probably closer to 5MM) will lose access to PUA 6. This will all lead to lower spending on goods and services a. Allowing these programs to lapse would reduce income by ~$150B in Q1 i. Weaker consumer spending would drop GDP by 1% 7. Other programs will also end at the end of this year a. Nationwide eviction moratorium b. Suspension of student-debt payments c. Tax breaks for businesses

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Unemployment claims rose last week (WSJ) • Initial jobless claims rose by 31K to 742K. This is more than 3X the level in early 2020.

The number of long-term unemployed is growing (Bloomberg) 1. The number of long-term unemployed (>26 weeks) is increasing. a. This matters because unemployment benefits run out in most states after 26 weeks. b. The federal program that gives 13 extra weeks is scheduled to end on Dec. 31. 2. Research shows that longer durations of jobless benefits are particularly helpful for women, people of color and the less educated. a. These groups of unemployed often have lower savings and this forces them to accept jobs that are a less-perfect match. 3. The length of unemployment benefits should be tied to the unemployment rate (we shouldn’t be dependent on Congress extending benefits). E. Education

Problems with forgiving student debt (Bloomberg) (Manhattan Institute) Student debt can make it difficult to leave a job and start a business. It can also impact personal consumption and homebuying. Most student debt is owed to the U.S. government, so the government could forgive it. But, there are problems:

1. It’s a regressive wealth transfer a. Americans with most debt have the most income and wealth b. 42% of college graduates under 35 are homeowners vs. 33% of non-graduates 2. Backlash from people who: a. Didn’t go to college because of expense b. Paid loans off early c. Paid for college for their children 3. Moral hazard – people will start taking on debt with expectation that it will be released in future years 4. It’s not particularly stimulative in that you’re lowering debt of people who already have liquidity

Community colleges are seeing weak attendance (Chronicle of Higher Education) 1. Enrollment in community colleges is down 9.5% YOY. 2. Attendance by Black, Hispanic and Native American first-time students was down nearly 30% for each group.

International students aren’t coming to the U.S. (WSJ) 1. The number of new international students at U.S. campuses dropped by 43% this fall. 2. Overall, enrollment of foreign students fell by 16%. a. Foreign students who are online count as enrolled. 3. People blame the pandemic as well as the impression that the U.S. is less welcoming.

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F. Other Economic Indicators and Economic News

Uncertainty can hold back economic growth (The Hill) We’re seeing tremendous uncertainty (which hurts hiring and cap ex):

1. Every major economy has suffered a recession 2. World merchandise trade suffered a record decline of 14.3% in Q2 3. Global foreign direct investment flows are forecast to decrease by 40% in 2020 YOY 4. Political uncertainty as Pres. Trump refuses to concede

Home sales are strong (WSJ) 1. U.S. existing home sales hit a 14-year high due to low rates and shifts in living preferences. a. This was the fifth straight monthly increase. b. October sales were 26.6% higher YOY. c. The median home price is up 15.5% YOY to $313K. 2. When policies expire that allow homeowners to temporarily suspend mortgage payments, we could have more distressed sales. 3. In the short-term, supply could drop due to Covid.

A Fed study shows why we’re fortunate to have a strong housing market (Federal Reserve) 1. After separating from jobs, homeowners face a slower recovery to pre-separation earnings than renters. 2. In the long-run, the impact of homeownership on earnings recovery seems to be dependent on housing market conditions. a. When housing conditions are weak, it’s difficult for people to move to job opportunities (“house-lock”).

Airlines are seeing fewer bookings (WSJ) • Airlines are reporting a drop in bookings. Number of people passing through security is down ~60% - 70%.

Recent wealth inequality numbers show a similar story to past numbers (St. Louis Fed) • New data shows that for every dollar of wealth for white families, the average Black household has 23 cents of wealth and Hispanic families average 20 cents of wealth. Note that this is using averages rather than medians.

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IV. Politics

We need multilateralism to deal with China (WSJ) 1. Republicans from the Senate Foreign Relations Committee released a report arguing that we should work more closely with European partners, the UN and other market-led democracies as we confront China. a. We have to overcome disputes with Europe such as arguments over government subsidies (Airbus vs. Boeing). 2. Pres. Trump deserves credit for increasing awareness of the problem with China but we failed to enlist broad European support. a. A multilateral approach would allow European governments to take a tougher approach collectively to China than they could individually. b. It would also help to prevent China from singling out American businesses and farmers for retaliation.

Workers are on food stamps (Washington Post) 1. The nonpartisan GAO found that a sizable number of the recipients are employed by some of the biggest and more profitable companies. a. They studied data from 11 states on Medicaid and SNAP (food stamps). b. Approximately 70% of the 21MM people receiving Medicaid or SNAP work full time. c. The federal minimum wage is $7.25 (although many localities require higher wages). 2. The named companies: a. Walmart was one of the top four employers of SNAP and Medicaid beneficiaries in every state. b. McDonald’s was in the top five in at least nine states. c. Other companies that were near the top of this list were Dollar Tree, Dollar General, Amazon, Burger King and Fed Ex. 3. The companies defend their actions: a. McDonald’s said that they pay more than minimum wage and they have stopped lobbying against increases in the wage. b. Walmart said that they are at the top because they are such a large employer and many more people would be receiving benefits if they didn’t have jobs at Walmart. 4. The others side argues: a. Walmart had a $5.1B Q3 profit because of these government subsidies to their workers. (McDonald’s earned $1.76B in Q3.)

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The year of the woman (WSJ) 1. Women made up 53% of the electorate and they voted for Biden by a 55% to 44% margin. a. Men went for Trump (52% to 46%). So, the winning margin came from women. 2. Senator Kamala Harris will become the first woman to serve as vice president. 3. At least 17 new Republican House members are women (with two races still undecided). a. This nearly doubles the previous record of nine new Republican women elected in 2010. 4. For the second straight election, a woman was the manager of the winning presidential campaign (Jen O’Malley Dillon this year and Kellyanne Conway four years ago). 5. Women were key allies for Biden: Gov. Gretchen Whitmer in Michigan, Cindy McCain in Arizona, and Stacey Abrams in Georgia. 6. Women will hold key positions in the Biden administration. a. Lael Brainard could be Treasury secretary, Susan Rice could be secretary of state, and Michele Fournoy could be defense secretary. b. He may ask Meg Whitman (a Republican) to be in the cabinet. 7. Nancy Pelosi remains as the House Speaker.

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