Get Ready for Election Cycle Drama

Good morning – so half the year has gone by already… and if you’re like me – I’m happy to say good riddance… Who would’ve thought what happened (and is still happening) could really have happened? I mean think about it – but to do so you have to go back to early 2018 when the administration embarked on new trade negotiations with China – it what became known as the US/China Trade War… We went through contentious trade negotiations for nearly 24 months – then arrive at a phase 1 deal that China isn’t really happy about that was signed with all the pomp and circumstance of some ‘historic agreement’. Both sides claiming victory to some degree – that was then – January 2018 – December 2019… it was a long 24 months… trade headlines drove so much of the daily moves in stocks as street analysts and strategists tried to reconcile every tick in stock prices with each trip back and forth between DC and Beijing… as  global investors had to deal with the constant bickering and economic threats posed by both sides… and then it was done – signed, sealed and delivered in December 2019… Now onto to phase 2 of the plan… or so we thought.

Phase 2 never arrived (or maybe it did…) – what did arrive was a curious flu-like virus that began in Wuhan, China – in what is known as the ‘wet markets’ – a virus that wasn’t revealed to the world or to the WHO (World Health Org) until it started to spin out of control – infecting and killing people in China with reckless abandon… causing the gov’t to shut down parts of that country during their New Year’s Celebration in late January… Without much explanation or information, the world tried to assess what was going on – Warnings from European and US scientists, doctors and epidemiologists started to spin around the globe – and then Italy gets whacked – bringing that country to its knees shutting down everything… I mean – shut it down, like turn off the lights… the virus then took hold of Europe and began infecting every country on that side of the world. US scientists were ringing the alarm bells, talk of the virus turned from epidemic to pandemic by early March – and then US cases began to appear – global markets began to price in a global economic disruption… By early March signs of the virus were everywhere and you know what happened next… no need to re-write history… Stocks plunged as the US went dark – shutting down everything that was considered ‘non-essential’, cities were like ghost towns, public transportation ceased to run, doors remained locked trapping everyone inside and the markets plunged. The global economic engine – powered by the developed world – went silent and the world changed forever.

In short order – the US & global markets fell off the cliff – massive stock losses happening in what seemed like hours – causing panic to ensue… selling became reckless – as it usually does until gov’ts and central banks around the world stepped in to try and stop the bleed – stimulus programs, non-recourse loans, gov’t social programs – you name it and it happened – all attempted to soften the blow of a massive engineered global ‘recession’… stocks – driven by artificial intelligence algos – weren’t sure what to do – so they became extremely volatile – surging and then plunging in price for weeks… everyone had an explanation – some even going so far as to create a conspiracy theory… while others tried to explain it scientifically. No matter what the explanation – the virus that erupted in December of 2019 – continues to infect the world and create angst today.

But if you look just at stock prices – you would see a different story… the charts looking like what happened in the fall of 2018 – when stocks plunged on economic concerns and then surged after central banks around the world stepped in to save the day… after falling nearly 30% off their highs in early 2020 – stocks found a bottom on March 23rd and began the next phase – talk of economic data for 2020 was completely dismissed (although it was incredible to witness…) – company earnings and guidance useless… talk of ‘Great Depression’ like scenes were common as the world fought to come out the other side… in the end – Chaos created opportunity for some, while creating devastation for others… Those strong enough bought into the ‘sale’ going on in the global markets while others couldn’t run for the door fast enough…

New WFH (Work from home) stocks emerged to assist in changing the world – white collar jobs went remote – causing expensive office space in the big cities to remain vacant – teleconferencing, online shopping, email, slack messaging, in-home schooling went viral as citizens around the world dealt with this 21st century disaster… gov’ts and central banks threw money at it and stocks recovered… putting in the ‘best quarter’ since 1998! The media suggesting that investors began to assess the ‘better than estimated’ economic data that was emerging against the surging rates of infection vs. declining rates of death and the ongoing – even more difficult trade relations with China.

By the end of the day on June 30th – the Dow added 217 pts or 0.85%, the S&P added 46 pts or 1.54%, the Nasdaq rose 184 pts or 1.87% and the Russell rose 20 pts or 1.4%… and for the quarter (beginning April 1st)  the Dow rose 25%, the S&P rose by 27%, the Nasdaq gained 38% and the Russell added 35%… leaving the indexes for the first half of the year – mixed… The Dow is down 9.55%, the S&P is off 4%, the Nasdaq is up 12% and the Russell is off by 13%.

The Nasdaq performance sums it up perfectly – technology has changed the way the world works and this pandemic has caused investors around the world to go all in on technology that will lead us out of the economic disaster we are suffering. It has been nothing short of incredible to watch and live through, causing divisions among the country – about who is responsible, what could have been done, how in the 21st century this could even be possible… I mean – let’s be serious for one minute – could anyone have stopped this pandemic? Can anyone stop the next pandemic? My guess is no – How can you stop a pandemic when you don’t know it even exists nor do you know how it originated – sure you can try to be prepared – but if we are being serious – it is impossible to predict – and all you have to do is look at the devastation it caused in countries around the world… Not one country was spared from the virus nor did any country have a treatment or vaccine for the virus… this conversation will go on for years as the history books try to explain it – with both sides of the argument being supported by facts that tell only that side of the argument… a truth that is supported by the history books already.

Stocks rally in quarter end – Do not discount coming earnings and the Presidential Election this quarter…

Yesterday’s action being driven by qtr end window dressing and an appreciation for improving economic data… which I think will be short lived… today is a the beginning of a new quarter – so the slate gets wiped clean and the fun starts all over again… earnings are due out starting next week – and the outlook remains cloudy at best, as companies struggle to provide any kind of guidance – most will not – claiming it is impossible to do so…leaving investors to assess the state of the union on their own…

We are also now in the throes of the final round of the Presidential election cycle – it is Trump/Pence vs. Biden/?. Talk of a democratic sweep now common – as the far left looks to take over all 3 ‘houses’ – The White House, the House of Representatives (which they already own) and the Senate (one that they need to take to fulfill their agenda). Biden recently coming out to warn Americans to expect tax increases both at the corporate level and the individual level – as he and they seek to undo the Trump Tax & Economic package that has stimulated the economy for nearly 3 years now… Trump and the GOP on the other hand are talking about more tax cuts to help stimulate us out of this economic disaster we are in due to the outbreak of corona…

The next 4 months is expected to be tough – expect lots of drama, expect lots of misinformation on both sides, expect lots of fights on the ground and in the air… as Americans will be asked to go to the polls and vote. Some will express their dissatisfaction by boycotting the process – while others will scream about how important it is to stand up and be counted… either way – expect it to be difficult and angry as the fight goes on and stocks react – because they will react to what they perceive to be the future administration.

If the Democrats sweep – look for upheaval in Tech, Banking and Finance and the Energy sectors as they have made it clear that they plan to dismantle and regulate these sectors even more than they are. If the GOP retains control of the WH and the Senate then look for nothing done and continued gridlock for the next 4 years… Remember – there are many ways this could play out – and stocks will begin to reveal what that outcome will be…

Overnight in Asia – stocks began the quarter mixed… China reports better than expected manufacturing data – the Caixin/Markit Manufacturing PMI for June came in at 51.2!  Solidly in expansion mode… and above the expectation of 50.5. The BoJ (Bank of Japan) on the other hand warning of ‘worsening business conditions’ across the country. Hong Kong was closed for the holiday – celebrating the return of HK to China 23 years ago – which itself is a concern – because China has basically voided the 50 year agreement they signed with the UK  23 years ago… HK woke up to their new reality today and it is not pretty… as China began enforcing the sweeping changes that will redefine HK completely. And this is a larger negative story for the world and the global markets.

European markets are off to a weak start – as they digest the latest manufacturing data out of China and the new look to HK in the days ahead… German manufacturing while improving is still in contraction mode – after IHS Markit reported the flash estimate at 45.2 – well below the 50 mark, but up from 36.6… German unemployment rose by 69,000 in June – a vast improvement over May’s losses of 237,000 jobs. Virus concerns remain on the front burner though, causing markets to remain skittish. As of 6:45 am – the FTSE -0.47%, CAC 40 -0.63%, DAX -0.44%, EUROSTOXX -0.46%, SPAIN -0.45% and ITALY – 0.65%.

US futures are weaker this morning – and that should not surprise anyone… the Dow is down 209 pts, the S&P is off 19 pts, the Nasdaq is giving up 45 pts and the Russell is down 19 pts.

Dr. Fauci all over the news yesterday and today re-iterating that the surge in cases is ‘very disturbing’ and that the US is ‘not in control’. He also said that we can expect 100,000 new cases a day in the coming weeks (currently we are running at 40,000 new cases/day)… while also saying that he can’t make an accurate prediction – and that this is a best guess. New cases now outpacing the rate in April – as more and more testing reveals more and more infections. What we did not see yesterday though, was the fact that deaths are now in decline at a faster pace than any time since this began. More infections/lower deaths can’t be seen as completely negative, can it? I mean there has to be something positive about declining death rates, no? In any event – the tone of this will be driven by how people react – do they feel safe? And right now for so many, the answer to that question is no…

There are only two days left in this week – expect volumes to decline today and tomorrow as we prepare for the July 4th holiday… that in itself can produce outsized moves in either direction as many will be away from their desks… Buy orders and sell orders will be placed well below and above current levels so that asset managers can take advantage of any volatility that results while they are away… I mean If you can buy good names at a discount why wouldn’t you? And if you can sell names at an elevated valuation, why wouldn’t you?   It’s called risk management – talk to you advisor – and stick to the plan.

The S&P closed at 3100!  – a nice round number… all the quarter end excitement and window dressing being credited to the move. The S&P is now in the 3020/3130 range… My guess is that the next move is a bit lower as we enter earnings season… Look – no one expects a blockbuster season at all, but they will be yearning for guidance – guidance which I don’t think they will get with any real clarity… so the markets will decide if they approve or not. Companies will try to manage expectations going into the balance of the year and into 2021… and investors will vote with their dollars… adding defensive names to your portfolio would not be a bad idea – but more importantly – remain balanced in your outlook and in your portfolio.

Take good care – Happy 4th of July….

Kp


short rib burgers

Short Rib Burgers

These are crazy good…they are a bit of work – but if you have the time and you really want to impress – go for it.

Refer back to the Short Rib recipe below. Make 1/2 dozen ribs – the night before… cool and then shred the meat off of the bone… Now when ready… bring the shredded meat to room temp and then mix the cooked short rib meat with the ground chuck (now use real ground chuck – not lean hamburger meat… you want it to have the fat for flavor) season with s&p and form the burgers. Light the grill and let it get nice and hot and cook. Top with sautéed onions and Monterey jack to complete this burger.

While this is cooking – butter the Brioche buns and toast either on the grill or in a frying pan… Then place the cooked burger on your bun – with fresh lettuce and the sautéed onions. Mayo and Ketchup on the side. Outstanding. Be sure to have hot dogs, cole slaw, watermelon salad, apple pie and ice cream to fill out the table.

Braised  Short Ribs

Begin with 6 / 8 beef short ribs.  season with s&p and then brown in a frying pan with a bit of Olive oil.  Make sure to brown all sides being careful not to burn the meat.  After you have browned them – place them in a large/deep baking pan.  Lining them up on their sides.

Next –  large Chop – 2 lg White Spanish Onions, 1 bunch of celery stalk, 1 bag of carrots.  Smash 4 /5 cloves of garlic and add to the meat – making sure you disperse the garlic all around.  Next add the chopped veggies right on top.

In the frying pan that you used to brown the meat – add:  1 can beef broth, 1 can tomato paste, and 1/4 to 1/2 bottle of red wine.  mix well and let the broth come to a boil for a couple of min as you steam away some of the alcohol in the wine.   Bathe the short ribs in this mixture and cover tightly.   Place the baking dish in the oven – preheated to 350 degrees. Let cook for 4 hours – tightly covered.

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Kenny Polcari

Kenny is the editor of Morning Thoughts and has been with Seven Figure Publishing since 2019.

Kenny is a CNBC exclusive contributor appearing on shows like The Halftime Report, Power Lunch, and Closing Bell. His market commentary has reached audiences across the nation on media outlets such as Bloomberg, Fox, ABC, and more.

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