@theMarket: The Economy Versus the Stock Market
It is a tale of two markets. One represented by stocks, which has experienced a "V" shaped recovery, while the other (the economy) appears to be describing a "W." Can the two continue to diverge?
The short answer is "yes," as long as the Federal Reserve Bank continues to support the financial markets with unlimited stimulus. "Stocks are the only game in town," as one investor put it. "Bonds are yielding me less than nothing after inflation, and commodities are just too risky."
That sums up the present state of affairs facing investors.
The fact that earnings have been absolutely dismal in the latest quarter meant little to the markets. Earnings forecasts have been reduced to such a low point that the majority of companies have had no problem beating estimates. Some companies, especially in the technology space and stay-at-home stocks, have actually thrived during the pandemic.
I wish that could be said for the overall economy, but the coronavirus doesn't care what kind of economic models we fashion. Everyone hoped that by this summer the virus would have done its damage and moved on, but containing the virus has proven much harder than we imagined.
Despite the on-going virus burden, U.S. employers added 1.8 million jobs in July. That was an upside surprise. Average hourly earnings month-over-month were up 0.2 percent (versus -0.5 percent expected), which was good news as well. The service sector led the gains in the non-farm payroll report.
The only downside may be that the stronger than expected employment data may remove some of the urgency for an immediate compromise on a new stimulus package between the two parties. This week, investors had been hoping Congress would give the economy another jolt of stimulus, but so far nothing has materialized. Both Democrats and Republicans say they are getting close, but also add that they are still "trillions of dollars apart" from a compromise on a workable bill. Friday (today) was the self-imposed deadline for a deal, but after a marathon session on Thursday night, the politicians had nothing new to report. I do believe that in the end the two sides will hammer out a deal. It is just too important to the economy for our legislators to fail.
In the meantime, President Trump is trying to alleviate some of the suffering this stimulus delay may be causing Americans. He has said that he will try and implement executive orders for payroll tax cuts, assistance with both student loans and evictions, as well as unemployment benefits. An announcement may be forthcoming shortly on this subject.
As for the markets, we have reached a point where the S&P 500 Index is positive (up 2.3 percent) for the year. That is no mean accomplishment, given the ongoing burden of the pandemic. We have the Fed to thank for that, as well as the federal government's fiscal stimulus programs. As long as the central bank's monetary policy remains accommodative, we should be in good shape. But that does not mean that stocks can't go down.
One risk to the markets may be the on-going tech war between China and the United States. Readers should read yesterday's column, "Tensions with China may heat up," on the issue. President Trump escalated the pressure on Chinese companies by signing two new executive orders on Thursday. He has prohibited U.S. residents from doing business with the Chinese-owned TikTok and WeChat apps, beginning 45 days from now. On Friday, he added sanctions on Hong Kong leader Carrie Lam and 11 other individuals for implementing "Beijing's policies of suppression of freedom and democratic processes."
He worries that these Chinese companies are gathering personal information on Americans that may present a security risk. In addition, an influential group of U.S. regulators said stock exchanges should set new rules that could a trigger a delisting of Chinese companies. The president's Working Group on Financial Markets insisted that Chinese companies must be required to allow access to their audit work papers.
So far, we have been dealing with a "Teflon" market where bad news simply rolls off the averages and only good news is discounted. There is a risk that this tech war could escalate and test that concept. If I were you, I would expect China to retaliate against our actions fairly soon. If investors get spooked, it could cause a short-term decline in the markets.
@theMarket: Stocks Fall as Congress Fails to Act
It should come as no surprise that our politicians failed to compromise on a new bailout package this week. It is symptomatic of a country that suffers from a great philosophical divide. The only entity that investors can truly believe in is the Fed. Keep the faith.
Chairman Jerome Powell, in his Thursday press conference after the two-day Federal Open Market Committee meeting, said the path forward is "extraordinarily uncertain." As such, our central bank will remain accommodating, he promised, which means the financial markets will continue to be supported going forward.
Readers should remember that. Over the long term, I plan to remain constructive towards the stock markets. However, in the short-term, we need to contend with a number of negatives.
The unemployment numbers are going up, not down. Economic data may also weaken during the next few weeks. You can thank those red states that ignored expert medical advice and reopened their economies for that. As a result, businesses have had to cancel, or slow their plans to reopen some state economies. And now those COVID-19 hot spots appear to be spreading and moving toward the Midwest. I expect this trend to continue.
And while the numbers of cases and deaths (more than 151,000) continue to climb, the Republican's answer is to announce a $1 trillion rescue package. The centerpiece of their legislation is focused on protecting businesses from lawsuits by employees who sicken and/or die by coming back to work and extending the PPP benefits to businesses.
The Democrats want a $3 trillion package which focuses on the unemployed and additional funds to state and local governments. As of this writing, the parties remain far apart. In the balance are millions of Americans who will be facing eviction notices with reduced unemployment compensation and no job prospects.
All but the most conservative economists believe that the $1 trillion plan offered by the Republicans is woefully inadequate. There is also no evidence whatsoever that the Republican claim that the additional $600 a week supplement in unemployment is encouraging workers to remain at home instead of looking for jobs that do not exist.
I am also quite concerned with the planned re-opening of the nation's school systems. My recent column, "How much are your kids worth," outlines the horrible choice parents in America have to make in the next few weeks.
The risk I see is that, like the push to re-open states prematurely, school re-openings may follow the same path and backfire (as it has in many other countries). Children in classrooms might become "super spreaders" of the virus, infecting themselves, their parents, grandparents, along with their cities and states.
I warned readers two weeks ago to prepare for some volatility in the event Congress failed to act before the end of the month. That prediction has come true. The longer politicians continue to procrastinate, preen, and pose for the cameras without delivering another fiscal stimulus package, the longer financial markets will continue to gyrate. Since market participants have already priced in another stimulus package, the failure to pass this legislation would trigger a market decline. Readers should also remember that the months of August and September have not treated investors kindly in the past. Let's hope the politicians don't make this a self-fulfilling prophecy.
@theMarket: Bailout blues
Investors have been giving Congress the benefit of the doubt — until now. A long-promised second tranche of fiscal stimulus was supposed to be passed by the end of the month. The clock is ticking, but the horse-trading has just begun.
On Aug. 1, the rent is due for millions of Americans. The sunset of the $600 in additional weekly unemployment benefits legislation, which amounts to almost 60 percent of their benefit, will have expired unless Congress acts. The GOP has dragged its feet for almost two months, hoping that the economy would bounce back, and relieve them of their responsibilities. The GOP and their leaders miscalculated.
Right now, the two sides are far apart. The Democrats want upwards of $3 trillion in additional support, while the Republicans can't even find agreement within their own caucus on a $1 trillion package.
As in so many disagreements between the parties, politicians will most likely try and pass an 11th-hour compromise. If that fails, they can always resort to that tried-and-true tactic of extending the deadline. Kicking the can down the road while politicians haggle is better than nothing, I guess, but that tactic won't prop the economy up for too long. The markets know this.
For the last two weeks, jobless claims have been creeping up, with this week's 1.4 million job losses representing a potential rolling over in the trend of reducing job losses. That should come as no surprise, given the number of skyrocketing virus cases and deaths in Republican-controlled states. The U.S. now has more cases of COVID-19 than any other country in the world. We all know why and who is responsible for this debacle.
The question investors should ask is whether the forced shutdown in some local Red State economies is going to be bad enough to reverse the trend of job gains and hurt the economy over the next month or two. If that happens, it is a foregone conclusion that Donald Trump will go down in defeat in the November elections, as will the GOP majority in the U.S. Senate. The Republicans know this, so a second CARES Act tranche should be high on their priority list.
U.S. Treasury Secretary Steve Mnuchin, who has had some success negotiating the first package with Speaker of the House Nancy Pelosi, is already floating trial balloons, such as hinting that the new bill will reduce unemployment benefits to about 70 percent of the present $600 a week, add-on benefit. Another stimulus check to Americans might also be included in the Republican version of a second stimulus package.
All of these negotiations will keep stocks contained, at least until Congress passes this second bailout. Last week, I had worried that the European Union's $1 trillion stimulus package, as well as the American version, would be delayed by a month or so. However, the leaders of the EU, in a four-day weekend marathon session, actually did compromise and were able to announce an agreement earlier this week. That gives me some hope that our own politicians could actually pull a rabbit out of the hat and pass legislation, even though the two parties have not even begun to negotiate this deal.
Last week, I wrote that the markets would not take kindly to these kinds of political shenanigans, especially in the face of data that suggests the economy is rolling over. The combination of a weaker jobs number, plus disarray among Republicans, sent stocks lower for the week. In addition, on-going Chinese/American bickering resulting in a tit-for-tat closing of a consulate in each country did not help the mood of investors.
As I wrote yesterday in my Retired Investor Column, the U.S. dollar is weakening and looks like it has further downside ahead. That should be good for commodity stocks, like gold (the topic of another recent column), silver, copper, and other basic materials, but worrisome to the overall markets.
The switch I pointed out to readers last week from growth to value also seems to be working. Industrials, retail, materials, small caps, transportation, and financials are playing a bit of catch-up versus the technology area. In my opinion, that is a good thing and something I would like to continue to see going forward.
As long as there continues to be good news on the vaccine front, markets will be supported. Periodic pullbacks like we are witnessing this week, and possibly into next week, are good for the market. Where I find the greatest risk to the markets and the economy is the re-opening of the school system a month from now. But that is a topic for a future column, so don't miss it.
@theMarket: Vaccine-Driven Markets
Investors are caught in a tug of war. On one side are the growing cases of COVID-19 throughout the country. On the other, the expectations that a virus cure, or at least a vaccine, is just around the corner. The market remains in the middle.
That's all you need to know to understand what happened to stocks this week. Two different announcements concerning vaccine progress had traders bid up stocks. The daily toll of deaths and cases, the slowing of the re-opening process, and the controversy over the coming school plans, all had a dampening effect on markets as well.
The quarterly corporate earnings season is also upon us. Management's guidance on how they see their businesses recovering, if at all, are being followed closely by one and all. If we combine that with whatever new China bashing the president can come up with, you have a perfect storm of concerns. And what have I said about Walls of Worries? At the least, these cross currents should keep traders jumping.
Aside from the daily ups and downs of the market, there are some shifts underneath the overall averages that you may have missed. For example, the large cap technology sector, represented by the NASDAQ 100 Index, has seen the lion's share of gains since the March lows. Sure, many sectors have rebounded, but none can compare to the performance of the NASDAQ (17 percent-plus) thus far in 2020. Why?
Bulls reason that in a recession, large cap tech companies are "defensive." Businesses, as well as individuals, can't do without the products these companies offer, regardless of economic conditions. It also helps that these same companies are in fantastic financial shape with huge amounts of cash on their balance sheets. They are labeled "growth" and "defensive" companies.
But "value" stocks, those that depend on the economy for their growth and survival, have largely been left in the dust this year. Financials, industrials, energy, materials, transportation, retail, et al, have underperformed. That's because there will be no real economic recovery without a medical solution to the pandemic. A successful vaccine is the key. It could unlock the door to a "catch-up" trade in these value sectors.
If one looks at the valuation between value and growth, even the most ardent tech bulls acknowledge that the tech sector's valuations are in the stratosphere. Add to this that most of the gains since March are in a small number of stocks (like the FANG names). This does not fill me with confidence.
The good news this week, however, was announcements that at least two vaccines in Phase One studies look promising. The markets rose on the news but it was the value sectors which led, while technology underperformed. That is a good sign.
The week wouldn't be over without a comment on politics, since the investors and the nation are expecting another $1 trillion or more stimulus package within the next two weeks. The bail-out may happen, but given the election-year politics and the chasm between the two parties, August seems to be a better bet than July.
At the same time, leaders of the European Community are meeting this weekend to further their own trillion dollar-plus efforts to stimulate their economies. I expect agreement on that effort will also be delayed. Investors will most likely be disappointed by those delays, both here and abroad. As such, I expect markets to remain choppy throughout the remainder of the month, but with the trend still higher. Last week, I wrote that I was looking for another 100 points on the S&P 500 Index. We are half way there.
@theMarket: COVID Case Concerns Cramp Market Gains
The disparity between rising nationwide virus cases and a rising stock market finally took its toll on investors this week. While damage was sustained to the averages, it was far from a bloodbath. A few more days of the same back and fill would not be a surprise.
Stocks lost ground under the sheer weight of skyrocketing infections throughout those states that have heeded Donald Trump's directions to ignore medical advice and re-open their economies. Valuing election victory over lives has cost us all a great deal and it is not over. I expect that without a national policy, or strategy to guide us, today's regional "hot spots" will migrate. Carriers from one state, city, or town will spread the virus to others in a succession of infections that will prolong the pandemic and deaths.
As a result, we should also expect to see the economic data in the weeks ahead begin to reflect the case counts we are reading today. If so, you might be anticipating that the stock market will sell off, maybe even re-test the March lows. If you sold in a panic back when, (as many did) and missed the 53 percent move higher in the S&P 500 Index since then, I suspect that is what you are hoping for. Don't hold your breath.
Here is what you are missing. The stock market is not marching to the tune of the COVID-19 Top Thirty. Sure, on a day-to-day headline basis, markets could move up or down (like they did this week) as the case count worsens, or a new vaccine possibility is announced. But the stock market gains amassed thus far have been the work of monetary and fiscal stimulus.
The worse the infective fires get — the cases, the deaths, the weakening data — the more stimulus the government will pour on the flames. A new stimulus package, which may now be expected to total $1 trillion, could easily double, or triple, if things get out of hand. If stocks drop too fast, or too far, I fully expect the Federal Reserve Bank and the U.S. Treasury to step in and support the stock markets, as they are doing now in the bond markets.
Armageddon can only occur if no one does anything. In an election year that won't happen, in my opinion. Speaking of elections, Joe Biden launched his own version of Donald Trump's America First program. Biden's U.S.-centered plan would see government spend $700 billion in American-made materials and products over four years. Another $300 billion would go to U.S.-based research and development involving electric cars, artificial intelligence, and other cutting-edge technologies.
While he also promised to raise the corporate tax to 28 percent, Wall Street and big business were expecting that anyway, given that the Trump corporate tax cuts of 2018 did not produce the desired results. Overall, investors seemed to take on board that a Biden victory, while possibly disruptive to further gains in the stock market, would not necessarily spell the end of business, nor usher in an era of socialism/communism as the president would have us believe.
Earnings season begins next week with the money-center banks reporting in mid-week. While results are backward-looking, and therefore already discounted by the markets, investors will be listening for guidance from the CEOs and CFOs as to whether the economy is beginning to roll over again (the bear's case), or that the economy is still gaining momentum. Either way, expect volatility.
As for where I see the markets going, my bet is that we could see the S&P 500 Index tack on another 100 points before the end of July. At that point, let's reassess.