Stocks experienced an impressive rebound today with the S&P 500 up around 4.25%.  One of the best performing sectors today was Health Care which gained 5.76%. Performance has been even more impressive for the Health Care Providers and Services industry which was up over 12%. The major catalyst has been Joe Biden’s strong performance on Super Tuesday placing him as the front runner for the Democratic ticket.  Betting markets (ElectionBettingOdds.com) now give the former Vice President an 83% chance of being Trump’s challenger come November as shown in the chart below.  Over the past year, no Democratic candidate has been given this much certainty to win the nomination. Biden’s surge in the past couple of days has borrowed from not only those who have dropped out of the race like Bloomberg, but also from more progressive candidates like Bernie Sanders and Elizabeth Warren. With those more progressive candidates who threaten to shake up the Health Care space on the decline, Health Care stocks have had reason to run. Today’s response by these stocks to Sander’s decline in the polls is perhaps a more dramatic version of the same dynamic as we saw in late 2019 during Senator Warren’s rise and subsequent fall as the Democratic favorite.  Start a two-week free trial to Bespoke Institutional to access our interactive tools and full range of research.

Bespoke co-founder Paul Hickey appeared on CNBC’s Squawk Box this morning to discuss markets and where they stand after the recent declines.  To view the segment, please click on the image below.

ISM’s Non-Manufacturing index has now risen for three straight months for the first time since the three months ending in August of 2014. Up to 57.3, the index is at its highest level since February of last year.  Likewise, the composite reading (including both the service and manufacturing indices) has now risen in back-to-back-to-back months for the first time since April 2016. The index is now at 56.5, and is healthily above the recent multiyear low of 52.9 from September. That 56.5 reading is also the highest the composite has been since February of last year.

As with the Manufacturing Index which we discussed on Monday, due to the timing of the survey the full effects of the outbreaks of Covid-19 outside of China are not fully represented in this report as those occurred later in the month.  But even more limited to China, just as the manufacturing report did, company comments highlighted the coronavirus as a growing concern nonetheless. From these comments, the impacts of the virus do not appear to be extremely widespread at the moment with only three industries referencing it.  While Construction and Health Care industries have noted concrete effects in the form of “increased lead times for critical items” and “major back-orders” for items like masks and gloves, the mining industry failed to mention more specifically what consequences have already taken effect.  For both the Manufacturing and Non-Manufacturing reports, expect mentions of the virus to be much more prevalent in the commentary section next month.

Breadth in this month’s report was strong with every category now sitting in expansionary territory, two of which—Backlog Orders and Inventories—were not last month. Additionally, all but three categories (Business Activity, Prices, and Import Orders) rose from one month ago.  Compared to one year ago, breadth is more mixed.

New Orders were a bright spot rising to 63.1 which is tied with June of 2018 for the strongest reading since July of 2015 when the New Orders index was just slightly higher at 63.4. Prior to that, you would need to go back to 2004 through 2005 when there were several months of higher readings. Additionally, the month-over-month increase of 6.9 points was the sixth-largest increase on record and the largest since a 7.6 point increase in January of 2018. While this could change in next month’s report, this shows that at least prior to the coronavirus outbreaks outside of China, activity in the services sector was near historically strong levels.

Backlog Orders echoed this trend. The index rose 7.7 points which was the largest month-over-month jump in Backlog Orders since May of 2018. Again, this seems to point to solid demand for the service sector.

To handle this stronger demand and get ahead of future impacts from the coronavirus, businesses have also increased inventories. After falling to 46.5 last month, the lowest level since October of 2012, Inventories rose back into an expansionary level at 52.4. That was the largest increase in a single month since April of 2014.

Despite this strong demand, the index for Prices Paid has continued to slide falling to 50.8.  While not indicating falling prices (readings under 50), it is the weakest reading since May of 2017. While low this month, this index is yet another category that could see a quick turnaround in the coming months assuming shortages from the coronavirus leads to higher prices as is beginning to be seen with some commodities. Start a two-week free trial to Bespoke Institutional to access our interactive economic indicators monitor and much more.

This morning’s ISM Non-Manufacturing report for the month of February was impressive at the headline level despite growing concerns over the impact of the Covid-19 virus. One aspect of the report where the outbreak is starting to show up is in the survey where companies are asked what commodities are in short supply.  In this month’s survey, ISM noted that 11 commodities were in short supply among companies in the Non-Manufacturing sector.  The chart below shows the number of commodities in short supply on a monthly basis with recessions highlighted in gray.  Going back to 1999, there have only been two other months where a larger number of commodities were in short supply and that was in the months immediately following Hurricane Katrina.

Looking at the commodities that were flagged as being in short supply in February, five can be directly related to Covid-19. As shown below, Medical Supplies, Personal Protective Equipment, Surgical Gowns, Surgical Masks, and Surgical Packs are all flying off the shelves. Start a two-week free trial to Bespoke Institutional for full access to all of our economic research and tools.

The yield on the 10-Year Treasury tipped below 1% today for the first time ever as the Fed cut rates by 50 bps. That is a record low yield for the 10 Year.  Meanwhile, the past few days have seen the S&P 500’s dividend yield rise to some of its highest levels in over a year. This leaves the S&P’s dividend yield at 2.1% today. That means holding the various levels of risk and other factors constant, stocks are yielding over 1% more than the 10-Year yield. That sharp divergence in yields is shown in the chart below.

Since the mid-2000s, the spread between the S&P’s dividend yield and the 10-year yield has only moved above one on one other occasion, and that was near the depths of the Financial Crisis in December 2008.  Start a two-week free trial to Bespoke Institutional to access our interactive tools and full library of research.