20 Nov MIXED DATA ACCOMPANIES A MIXED TRADING DAY
Equities were mixed with tech shares outperforming the broader market as all weighed the impact of tougher virus restriction on economic growth along with the outlook for widespread vaccine distribution within months.
Yesterday’s economic data was mixed as sales of previously owned homes unexpectedly rose in October to the highest level since November 2005. The median selling price jumped 15.5% to a record high.
Available inventory declined 19.8% in October and at the current sales pace the inventory would last a record low 2.5 months. Anything below five months is regarded as a “tight market.” Properties remained on the market for record low average of 21 days. Existing home sales account for approximately 90% of total home sales.
As noted many times, OER or owners’ equivalent rent—how much someone thinks they can rent their home for if it was indeed rental—is about 33% of most inflationary indices. OER is closely correlated to home prices.
Most people gauge their net worth by the value of their home not their stock account.
A major reason why inflationary pressures have remained “well anchored” is because OER has remained benign after crashing in 2008-09. The pivotal question at hand is whether or not OER will now begin to rise hence influencing inflationary expectations which in turn will impact equity valuations.
Initial jobless claims however rose for the first time in five weeks thus suggesting the labor market recovery is slowing amid a rising COVID cases and fresh business restrictions. Continuing claims however fell and are now at fresh pandemic lows. I must write continuing claims are about three times higher than average.
Radically changing topics, increased attention is now focused upon “rules-based investing” or Quantitative Analysis which slices and dices statistical information to predict the future from past results. It was viewed as relatively “risk free” until this year when it has been completely decimated by “one off events.”
Several times I have mentioned Great Lakes Advisors’ data that indicated quants have been hit by events “that statistically could never happen…”aka the massive two day transition from growth to value. Earlier I had commented about the implosion of several marquee quant firms, down about 28% YTD.
Yesterday it was reported that yet another marquee quant firm—Jupiter Fund Management– has entirely collapsed as its assets shrunk by a whopping 92% from roughly two years ago for the same reasons as others—the S & P’s massive concentration of funds into several companies, leverage and an extremely crowded trade.
As indicated, the prior years’ quant returns have been intoxicating, an intoxification that has led to its current demise. When everyone is doing the same thing, results will plunge under the simple premise of supply and demand. Who is left to buy when selling commences as was the case last week when value massively outperformed growth.
The operative question at hand will the value trade become dominant at the expense of growth? As indicated, yesterday growth outperformed value by a wide margin for the first time in about 11 trading days according to Bloomberg.
Nothing ever moves linear. As widely noted growth has crushed value since 2009. If Newton’s Third Law of Physics is applied to the markets, (for every action in nature there is an equal and opposite reaction), yesterday’s market action was an aberration.
If a transition is at hand, fortunes can be made or lost. Could these unexpected market occurrences indicate monumental changes in investor preferences? Unfortunately, only history will answer this question. As indicated, the brightest mathematicians in the world missed the clues leading into the implosion of “rules-based investing.”
What will happen today?
Last night the foreign markets were mixed. London was up 0.47%, Paris up 0.47% and Frankfurt. Up 0.44%. China was up 0.44%, Japan down 0.42% and Hang Sang up 0.36%.
The Dow should open flat on increased lockdown fears. The 10-year is off 2/32 to yield 0.85%.