CWS Market Review – December 11, 2020

“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” – Jack Bogle

Wall Street and the daily headlines seem to be in direct contrast. Each day, the number of new coronavirus cases ticks higher. More lockdown orders are going in place. Plus, the labor market has been sluggish of late.

Despite this, the stock market is as festive as ever. This week, the S&P 500 peaked above 3,700 to reach a new all-time high (see below). Not only that, but cyclical stocks are leading the charge. The Nasdaq 100 just ran off a 10-day winning streak. Even the IPO market is hot again (which I’ll talk more about in a bit).

What gives? In this week’s issue, I’ll try to unravel this contradiction and show that it’s not quite the paradox that it may appear. I’ll also discuss the optimistic guidance we got this week from Fiserv. The company is about to wrap up its 35th year in a row of double-digit earnings growth. Plus, Disney has some major plans for new content in 2021.

But first, let’s look at some recent economic news, which, as I said, hasn’t been so rosy.

Stocks Versus Headlines: Who’s Right?

Last week, the government released the jobs report for November and the numbers were underwhelming. Last month, the U.S. economy created 245,000 net new jobs. That was a disappointment. Wall Street had been expecting an increase of 440,000. It’s also a big drop from the gain of 610,000 we had in October. For November, the unemployment rate dropped to 6.7%.

That miss was the latest in a series of disappointing jobs reports. It’s no secret what’s happening. The recrudescence of the lockdowns is putting the squeeze on businesses, especially small businesses. There are now 10.7 million Americans who are unemployed. That’s 4.9 million higher than in February. Normally, a gain of 245,000 jobs would be a great number, but in 2020, it’s merely trying to fill the massive hole we dug for ourselves in February and March.

Thursday’s jobless-claims report was another disappointment. A total of 853,000 Americans filed for jobless claims. That’s the highest in nearly three months. Wall Street had been expecting 730,000. It’s also an outlier to the downward trend of the last several months.

The silver lining is that the soggy economic news may help spur along negotiations for an economic stimulus. On Capitol Hill, politicians have reached the crucial “finger-pointing stage.” This boring dance will probably go on for a few days. The important fact is that a bi-partisan group of lawmakers put forth a $908 billion plan, and both House Speaker Nancy Pelosi and Senate Minority Leader Check Schumer seem to favor the bill. Given the state of the economy, I suspect that some sort of deal will be reached before the end of the year.

There’s also been more encouraging news about the vaccine. The vaccine made by Pfizer and BioNTech just won approval by an FDA advisory panel. The vote in favor was 17 to 4 with one abstention. This is a very strong signal that the FDA will soon grant its approval. After that, the shots will be moved toward states within 24 hours. The vaccine is a two-shot deal that’s been shown to be 95% effective. Next up will be Moderna’s vaccine. The advisory panel will consider that one next week.

The stimulus hopes combined with optimism for the vaccines has helped push stocks higher. Not only that, but financial and energy stocks have been particularly strong lately. Both sectors have been laggards for a long time, so it’s good to see them finally take the lead.

Both financials and energy stocks are disproportionately represented in the value indexes; this has aided the market’s recent shift to value. These sectors are also cyclical indexes, which typically portend a rising economy.

Here’s an interesting chart. This is the four major cyclical sectors divided by the S&P 500. In other words, a rising line means the sector is outpacing the market. As you can see, all four have been beating the market lately. Energy stocks, the black line, are really humming along.

This trend has been mirrored in the bond market by higher interest rates. In August, the 10-year Treasury yield was near 0.5%. Lately, it’s been creeping up on 1%.

What’s even more interesting is inflation expectations. We can see this by comparing the 10-year yield with the 10-year TIPs, the inflation-protected bonds. The 10-year “breakeven” is now higher than it was since before the pandemic. In fact, it’s at a two-and-a-half year high. Inflation expectations are closing in on 2%, which is the Fed’s target (LOL).

I’ve been beating on this value/growth divide for several weeks so I may sound like a broken record (Google it, kids), but the trend persists. This could be a major theme for Wall Street as we head into 2021. Now let’s take a look at some recent action in the market for IPOs.

The IPO Market Heats Up

With the advent of the coronavirus and the subsequent lockdown, the market for Initial Public Offerings (IPOs) dried up. Now that Wall Street is in its happy place, there’s been a backlog of stocks waiting to hit the market.

This week, there were two major IPOS, from DoorDash (DASH) and Airbnb (ABNB). Not only were they looking to IPO at the same time, but both are fair representations of the new economy. The IPO market is interesting to watch because it can be a good gauge of investor sentiment. It can also be a warning when you see a lot of D-list stocks flooding the market. Remember 1999?

The interest in both DASH and ABNB was intense. In fact, the underwriters had to raise the price range prior to the IPO. That didn’t slow down the appeal. Both stocks priced above their range—and once trading started, the shares soared.

DoorDash’s pre-IPO price went from a range of $75 to $85 per share up to $90 to $95 per share. The stock was eventually priced at $102 per share. On Wednesday, the first trade was at $182 per share. At one point, DASH hit $195.50 per share.

Airbnb had been looking at a price range of $44 to $50 per share. That was increased to $56 to $60 per share. Then it was priced at $68 per share. The opening trade was $146 per share. That’s more than double the underwriting price.

Both of these offerings tell me that investors are optimistic and that they’re no longer running for cover like they had been a few months ago. There are more IPOs due over the next few weeks. This could be a good omen for 2021.

Investor Day for Fiserv and Disney

This is a popular time of year for investor days. This is when companies discuss their recent results and announce their plans for next year. I’ll be honest—a lot of it is corporate spin and PR. I get that, so I don’t get too worked up about investor day. Still, sometimes you can glean useful tidbits of actual news.

On Tuesday, Fiserv (FISV) held its investor day, and it had some good news to share. I like Fiserv a lot, but it’s had a tough 2020. That’s unusual for Fiserv. The stock trailed in the bear market and trailed in the rally. Lately, however, the shares have started to perk up.

Now let’s look at the guidance they offered. For 2020, Fiserv expects to see its EPS grow by 11% over last year. That would make it Fiserv’s 35th year in a row of double-digit growth.

Let’s do some math. Last year, Fiserv made $4.00 per share, so 11% from there comes to $4.44 per share. The company has raked in $3.12 per share over the first three quarters, so that implies Q4 earnings of $1.32 per share. Sure enough, Wall Street had been expecting $1.30 per share. That’s pretty good.

For next year, Fiserv expects internal revenue growth of 7% to 12% and EPS growth of 20% to 25%. Fiserv also expects internal revenue growth of 7% to 9% annually for 2022 and 2023, and EPS growth of 15% to 20%. I like those numbers, and I’m glad to see Fiserv’s optimism after a tough year.

Fiserv and AFLAC are our only two Buy List stocks that have been members all 15 years. Fiserv is a buy up to $120 per share.

The other big investor day this week was Disney’s (DIS) on Thursday. Actually, Disney is known for making a big deal out of its investor day, and 2020 was no exception.

Not surprisingly, Disney talked a lot about its streaming service, which continues to gain subscribers at a fantastic rate. CEO Bob Iger said that Disney+ now has 86.8 million subscribers. At the end of last quarter, they were at 73 million. Disney also owns Hulu and ESPN.com.

The lineup of new content is truly impressive:

Kareem Daniel, head of the company’s new media and entertainment distribution group, revealed that Disney+ will become home to 10 Marvel series, 10 Star Wars series, 15 Disney live-action, Disney Animation, and Pixar series and 15 Disney live action, Disney Animation, and Pixar films.

Dave Filoni and Jon Favreau, the masterminds behind “The Mandalorian,” are co-producing two additional series exclusively for Disney+ — “The Rangers of the New Republic” and “Ahsoka.”

As previously announced, “Andor” is coming to Disney+ in 2022. The 12-episode show follows K-2SO and Cassian Andor from “Rogue One” and has been called a spy thriller.

The company announced a new Star Wars movie coming in 2023 called “Rogue Squadron.” Disney knows exactly what to tell its fans.

There is a lingering question for Disney and the entire industry, and that is, “how exactly will all this content be distributed?” Will folks still be going to the movie theaters, or will it all be streamed? Also, what will the price structure be? It’s kind of odd that all movies at the theater cost the same, except for a matinee. Why should that be the case? Disney already experimented with that with Mulan.

I suspect the industry was already headed this way but that it was five to seven years off. Then came the coronavirus, and by necessity, the future got here quicker than we thought. Apparently, the mouse’s investor day was a hit. Shares of Disney were up over 3% in the after-hours market. The shares made a new high this week.

That’s all for now. There’s another Fed meeting next week. Don’t expect much in the way of new policies, but it will be interesting to hear what the central bank has to say. The policy statement is due out on Wednesday, and it will be followed by a J-Pow press conference. That morning, we’ll get the latest report on retail sales. On Thursday, we’ll get another jobless-claims report. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Posted by on December 11th, 2020 at 7:08 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.