M12 BARRON’S December 7, 2020
Market View
Payrolls: December Will Be Cruel
Economic Update
Regions Financial
regions.com
Dec. 4:Total nonfarm employment rose by
245,000 in November, with private-sector pay-
rolls up by 344,000 jobs and public-sector pay-
rolls down by 99,000 jobs. Prior estimates of
job growth in September and October were
revised up by a net 11,000 jobs for the two-
month period. The unemployment rate fell to
6.7%, but this reflects a decline in labor-force
participation as household employment fell
slightly. The broader U6 measure, which also
accounts for underemployment, fell to 12%
from 12.1% in October. The number of long-
term unemployed rose to 3.941 million people
in November, the highest number since De-
cember 2013. Average hourly earnings rose
by 0.3%, reflecting the shifting mix of jobs,
while aggregate private-sector wage and sal-
ary earnings were up by 0.6 percent...
While there are some indications, such as
restaurant payrolls falling by 17,400 jobs,
that the ongoing spike in Covid-19 cases is
impacting the labor market, that the Novem-
ber survey period ended earlier in the month
likely masked some of these effects. There
are likely to be much more visible effects in
the December employment report. At the
same time, seasonal adjustment factors are
likely to be somewhat cruel, rather than
kind, to seasonally adjusted December job
counts. So, while there may have been some
relief that the November employment report
wasn’t softer than it is, that likely won’t be
the case with the December report.
—RICHARDF.MOODY
China’s Bond-Default Boomlet
THINK Economic and Financial Analysis
ING
think.ing.com
Dec. 3:Onshore bond-market default risk in
China is accelerating. Companies that are on
the brink of default or have already defaulted
include both state-owned enterprises and pri-
vate-owned enterprises and stretch across
many different industries.
We group these companies into two main
groups. The first group is related to incident
cases that have lasted for years and would
already have defaulted if there had been no
pandemic or the trade war, as the economic
response to these shocks has delayed de-
leveraging reforms. The second group runs
businesses inefficiently with over-expansion
strategies and over-borrowing over many
years. It is quite clear that this current wave
of defaults is intentional by the government
to continue its deleveraging reform.
As it is part of the reform, the govern-
ment still plays a role even though it would
like the market to determine the key param-
eters of default, e.g. terms of restructuring,
or the percentage of haircut required. The
government does not want to create a re-
form-driven default crisis. The central bank
has injected short term liquidity into the
market to calm sentiment. And the central
government may delay a default which they
view as posing a systemic risk.
—CARSTENBRZESKI ANDTEAM
Bullish Portfolio Positioning
Market Navigator
SunTrust Advisory Services
truist.com
Dec. 3:The weight of the evidence suggests
the primary [market] trend remains higher.
Importantly, there is light at the end of the
tunnel on the pandemic. This should allow in-
vestors to look past some of the weakening
near-term trends given stocks are typically
valued on cash-flow generation over multiple
years. Moreover, strong price momentum, as
we have seen recently, has tended to be a
very good sign for markets when looking out
over the next 12 months. Monetary policy re-
mains supportive, earnings are rising, and
relative valuations continue to favor stocks.
For those investors working excess cash into
the market, we would average in and look to
be more aggressive on pullbacks.
From a positioning standpoint, we retain
an equity bias relative to fixed income with a
U.S. tilt. We upgraded our tactical view of
small caps recently and would view pullbacks
as opportunities to position for the year
ahead; relative valuations appear attractive,
comparative earnings and price trends are
rising, and sector composition is supportive.
Small caps should create an effective barbell
between growth and cyclical exposure. We are
maintaining, though closely monitoring, gold,
which we have been viewing as a portfolio di-
versifier and hedge. It has lagged, though, as
one might expect, given most recent market
surprises have been positively skewed. Al-
though less attractive, we still advise holding
some high-quality fixed income as portfolio
ballast. After a very strong month, the oppor-
tunity in credit has diminished, but we still
see incremental value given yield pickup and
an early-stage economic recovery.
—KEITHLERNER
Stock-Market Wallflowers
The Lancz Letter
LanczGlobal
LanczGlobal.com
Dec. 1:As valuations rise, the importance of
monitoring and limiting risk significantly in-
creases. The fact that there are still so many
areas that have not participated in this re-
cord-breaking market provides a lower-risk
way to participate. This strategy can be uti-
lized in nearly every sector.Pfizer[ticker:
PFE], along withGlaxoSmithKline[GSK]
are lower-risk opportunities in health care.
For example, instead of chasingZoomVideo
Communications[ZM] orSlackTechnolo-
gies[WORK], in the technology sector,Intel
[INTC],Cisco Systems[CSCO], andeBay
[EBAY} are all solid alternatives, plus they
will pay you a substantial yield while you wait.
—ALANB.LANCZ
Beware Reflation!
Insights
Heritage Capital
investfortomorrow.com
Dec. 2:The least talked about story in the
markets has been the collapse in the U.S.
dollar. While the dollar peaked in the height
of the Corona Crash in March, it was starting
to stabilize over the summer. The rally was
short-lived and it has been unraveling again.
Interestingly, the dollar and gold have
been moving in tandem of late, something
that we do not see all that often. Make no
mistake about it, the reflationary trend that
began in mid-April is continuing and the
masses are going to be very surprised at
just how much prices are going up.
—PAULSCHATZ
Tesla’s Impact on the S&P 500
Weekly Market Commentary
Winthrop Capital Management
winthropcm.com
Nov. 30:S&P reported last week thatTesla
[TSLA] will be added to the S&P 500 on Dec.
- With Tesla stock trading at a price/earn-
ings ratio of 149.1 times based on expected
2021 earnings of $3.85, the stock has a very
rich valuation. Large-cap funds that track the
S&P 500 will be forced to buy the stock to
maintain a reasonable tracking error with the
index. After a runup this year of 50%, Tesla
will be added to the Consumer Discretionary
sector, increasing the risk profile of the sec-
tor. The Consumer Discretionary sector in-
creased more than 70% so far this year, mak-
ing it the second-best performing sector
behind Technology. However,Amazon.com
stock [AMZN], at 44%, represents the larg-
est holding in the Consumer Discretionary
sector before Tesla is added. With the addi-
tion of Tesla, Amazon will decline to a weight
of 37% and Tesla will represent 12% of the
sector, putting it ahead ofHome Depot
[HD]. We are adding theInvesco S&P 500
Equal Weight Consumer Discretionary
ETF (RCD) to our Core Sector Models,
alongside XLY [Consumer Discretionary
Select Sector SPDR].
—GREGORYJ.HAHN,ADAMCOONS
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“Make no mistake about it, the reflationary trend that began in mid-April is continuing and the masses
are going to be very surprised at just how much prices are going up.” —PAULSCHATZ,Heritage Capital
This commentary was issued recently by money managers, research firms,
and market newsletter writers and has been edited byBarron’s.