@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.
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The Retired Investor: How Much Are Your Children Worth?
|Rachael Plaine and daughter, Lyla. Photo by Barbara Schmick|
In the weeks ahead, the U.S. Centers for Disease Control (CDC) wants your children to go back to school. They say it is necessary because children need schooling from a social, emotional, and behavioral health perspective. No one disputes that, so why are American parents balking at the idea?
The short answer is that they are afraid for their kids. It doesn't take a rocket scientist to understand that kids in a classroom are "super spreaders" of virus. Just think of what happens during the Flu season each fall and winter
Despite assurances from the CDC that death rates among school-age children are much lower than adults, they don't claim that no children will die if they go back in the classrooms. As such, parents are asked to play a percentage game. "What are the chances that my child will be the unlucky one and die because I decided to send them back to school to school?"
To make matters worse, the majority of Americans suspect they are not getting the true story when it comes to accurate statistics in regard to COVID-19. Between various reporting procedures among the various states, hospitals, and the federal government everything from double counting to underreporting is occurring.
School representatives across the nation also argue that they are ill-prepared, and do not have the funds to make their classrooms safe for students in a few short weeks. Thanks to the nation's less than robust response to the crisis, neither the funds nor the time to spend them is available for this school year.
The question to ask is, "why is the government, along with the business community, demanding schools reopen now, despite the accelerating rate of virus cases nationwide?"
The elephant in the room no one wants to address concerns the labor force and the economy.
As it stands, millions of working parents with children cannot both go back to work. One or another of the parents must stay home and mind the kids, since there is no child care (and probably won't be) until a vaccine is developed and administered nationwide. That means the economy, with roughly half the labor force stuck at home, won't be able to recover anytime soon.
In addition, an on-going, struggling economy will mean many companies will face bankruptcy and those who survive will be forced to "right-size," which means cutting their labor force permanently. Some already are. That would further compound the economic situation and potentially push out any recovery to sometime next year, if then.
Schools, however, provide huge positive benefits for both children and parents. Few families today can get by on one income, so without re-opening classrooms, the economic well-being of many families could be dire. Keeping schools closed would also unduly harm low-income and minority children and those living with disabilities. These students are less likely to have access to private instruction and care. In many cases, they are more likely to rely on school-supported resources like food programs, special education and after-school programs as well.
Today, there are no good options for these struggling parents. They must weigh in their own minds and hearts and the risk and rewards for keeping their kids at home, or sending them back to school under these most trying of circumstances. It is a terrible tragedy, and one with no solution. My heart goes out to all of you who must make this decision.
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@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.
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The Retired Investor: The Weakening Dollar
Sometimes, investors are so focused on the trees that they miss the forest entirely. Take the U.S. dollar, for example. It has been declining at an alarming rate, yet no one seems to care.
Today, investors are occupied by a number of trees — earnings, stock prices, dividends, earnings results — that a weakening currency is almost an afterthought. Unfortunately, if the dollar continues to weaken, it could radically change your investment choices.
Most readers, in general, believe a strong dollar reflects a strong economy. The fact that it makes our exports more expensive, and imports cheaper, is also true. A strong dollar, in the past, has also been a safe haven for overseas investors, who normally rush to buy the greenback when calamity threatens their own country.
There is also a relationship between the dollar, other currencies, and interest rates. If one country's sovereign debt is yielding more (or less) than another country's debt, then, all else being equal, investors will seek out and purchase the higher-yielding currency. That has been the case here in the U.S., where our higher yields have kept foreigners purchasing dollars in order to buy our bonds for the last several years.
The pandemic has changed that. The efforts by our Federal Reserve Bank to support the economy (by flooding the financial markets with money) has drastically reduced the difference in yield between America, Japan, and Europe. In addition, our deficit, as a result of all the tax cuts and spending throughout the Trump Administration, is starting to alarm investors around the globe. There is a fear that the Fed will need to print much more money (debase the currency) in order to fund the U.S. budget and deal with the enormous debt load we face.
At the same time, all that stimulus money had led some investors to believe that inflation is a much more likely bet in the future. That is a problem, since inflation destroys the purchasing power of a currency. As prices of goods and services rise, it takes more and more dollars to purchase them. It is, for example, why gold and other precious metals, along with base metals like copper, have begun to increase in price this year.
There are also doubts growing about how "safe" the dollar really is. The fact that the country is in disarray and deeply divided has not been lost on both our allies and foes. It is common knowledge, except in some parts of this country, that the Trump administration not only failed miserably in dealing with the pandemic, but has taken the tactic of claiming that the pandemic is overblown and not to be taken seriously. For the first time in recent history, foreign countries are barring Americans from entering their countries.
Many on Wall Street see the dollar declining further. I believe they are correct. If it does, there are some obvious beneficiaries that investors may want to examine. I have already mentioned commodities, like gold, silver, platinum, and copper, that normally rise in price as the dollar declines. Many emerging market economies are also based on their abundant natural resources. They too would benefit greatly from a falling dollar.
Oil normally would benefit as well, but I believe the price of oil will be held back by the pandemic in the months ahead. The demand for oil is correlated with mobility. Mobility worldwide, in the form of driving, flying, shipping, etc., has declined drastically due to the pandemic. In order for the oil price to rise, I believe, we need to beat the coronavirus first with a cure, or at least an effective vaccine. That may not be available until next year at the earliest.
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@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.
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