Chronicle Journal: Finance

Stock Market Duel: Stimulus vs. Virus Mutation

The S&P 500 (SPY) just can’t break out above 3,700. This commentary explores why this is happening along with a complete market outlook and game plan for investors to chart a course to future outperformance. Read on below...

(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).

Stocks are pretty much flat week over week as we just can’t seem to crack above 3,700. Hard to complain when the market was all the way down at 2,192 back in March. The main factors at play right now are a vaccine rollout at the same time a virus mutation has been discovered in England. Plus the finalization of the latest US government stimulus package.

We will sort through it all to chart a course forward for the weeks and months ahead.

Market Commentary

Even with a new $900 billion stimulus package being recommended by congress the market still tanked nearly -2% Monday morning. That’s because a new mutation of the Coronavirus was discovered in England.

At this stage the mutation looks like it just spreads faster, but is not necessarily more deadly. Also it is believed it will still succumb to the new vaccines that are rolling out.

Note that we discussed this very possibility of a virus mutation in my 2021 stock market outlook webinar on 12/7/20. The key is if it truly changes the course of the virus for the worse. If yes, then it would obviously have more detrimental effect on stock prices. Especially those industries in the “Back to Normal” trade (travel, leisure, entertainment etc).

The main point is that investors have pretty much had tunnel vision on society moving towards an end of the Coronavirus. Yet this news was a wakeup call that it “may not go quietly into that good night”. So we all have to be diligent to keep our pulse on developments from this point forward.

Gladly the early Monday beatings did not last for long as stocks climbed back to end the session down only -0.39%. The most harmed, of course, were the “Back to Normal” trades in travel, leisure and entertainment.

Yet given their tremendous gains over the past two months they had plenty to give back and yet still head and shoulders above the returns of the rest of the market. (Note that now may be a great time to load up on the “Back to Normal” positions in the Reitmeister Total Return portfolio...read more about that in the Portfolio Update section below).

Turning to the economic front we continue to have strong evidence of an improving economy. Here is this past weeks roll call of announcements:

PMI Composite Flash last Wednesday was positive once again at 55.7. Manufacturing proved to be the strongest component at 56.5.Remember that above 50 = expansion. And above 55 = impressive economic growth.

On Thursday Housing Starts and Building Permits continued to point to the current strength of this group. Low rates and a desire to move out of the densely populated cities are the key drivers of this trend. That was certainly a catalyst for our portfolio position, MDC Holdings. (More on that below).

Then we got a slew of the regional manufacturing reports showing varying levels of strength:

+11.1 for Philly Fed

+12 for KC Fed

+19 for Richmond Fed

Then to top things off was this morning’s Redbook Weekly Retail Sales report which continues to impress this holiday seasons as it spiked to a +6.5% year over year gain. Also with stimulus checks on the way for the holidays should put icing on the cake of this being a strong holiday shopping season.

Now let’s discuss Wednesday’s FOMC Rate decision where they stated emphatically that they will keep buying bonds until the economy is back closer to full employment. This was not wholly unexpected and stocks didn’t skip a beat.

The more interesting reaction was in the bond market where rates leapt higher on the news. At first this seems counter intuitive as it sounds like the Fed is going to proactively do things to keep rates low. But the flip side of that coin is the likely risk that the economy starts to overheat creating inflation. And yes, that would move rates higher over time.

Gladly we have a couple positions that benefit from higher rates. The regional banking ETF (ticker reserved for Reitmeister Total Return members) because these financial institutions make more profit in a higher rate environment. Second, is our ETF that shorts Treasury bonds (ticker reserved for Reitmeister Total Return members) .

At this stage I expect stocks to succumb to the typical seasonal trends. That usually means lower trading volumes with a mildly bullish bias. If true, then I would expect stocks to take a shot at new highs around 3,750 into the closing bell on the year. 3,800 is not out of the question. We are well positioned to benefit from these trends. More on that in the Portfolio Update section below...

Portfolio Update

Since last Tuesday’s commentary the S&P has been up, down and all around. In the end it actually peeled back a little at -0.20%. Gladly our portfolio of diversely attractive positions plowed ahead once again with a gain of +0.87% with most of the extra umph coming today.

This means we have outperformed the S&P for 4 of the last 5 weeks with a total gain of +10.95% versus only +2.15% for the S&P in that stretch.

Now let’s dig in with more insights on our picks. (The rest of the insights on the 8 stocks and 4 ETFs in the Reitmeister Total Return portfolio are reserved for members only. Read on below how to start a 30 day trial to see it for yourself).

What To Do Next?

Right now my Reitmeister Total Return portfolio is correctly positioned to benefit from the “Back to Normal” trade for the market. That’s because we are overweight the groups most likely to benefit from society slowly, but surely emerging from the dark hole of the Coronavirus period.

In all the portfolio has 12 picks ready to excel in the weeks and months ahead including:

8 growth stocks trading at attractive discounts to fair value. This is a diversified collection of stocks in booming industries like home building, tech, consumer discretionary, cloud computing and clean energy infrastructure. Most are still trading 20%+ below fair value.

4 ETFs. 3 of them are direct plays on the “Back to Normal” trade in travel, leisure, entertainment and economically sensitive groups like the banks. Then one more ETF to gain from the long term trend for interest rates to get back to previous levels. That position got a boost from the recent Fed announcement.

If you would like to see the current portfolio of 12 stocks and ETFs, and be alerted to our next timely trades, then consider starting a 30 day trial by clicking the link below.

About Reitmeister Total Return newsletter & 30 Day Trial

Wishing you a world of investment success!


Steve Reitmeister

…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return

 


SPY shares rose $0.91 (+0.25%) in premarket trading Wednesday. Year-to-date, SPY has gained 16.53%, versus a % rise in the benchmark S&P 500 index during the same period.



About the Author: Steve Reitmeister

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.

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