@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.
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The Retired Investor: Tensions With China May Heat Up
On Aug. 15, U.S. Trade Representative Robert Lighthizer and Chinese Premier Vice President Liu He, will be facing off once again; this time to review the Phase One trade deal inked on Feb. 15. Neither side is especially happy with progress so far.
From the U.S. point of view, China has not lived up to its agreement to buy $200 billion of U.S. goods over their 2017 purchasing level. Chinese imports of agricultural products are actually lower than the 2017 level, which is about half the level needed to meet their promised target of $36.5 billion. The energy purchases they promised have also fallen woefully short of their commitment. Only 5 percent of their $25.3 billion in promised purchases has actually happened.
From the Chinese point of view, the level of China-bashing that is going on as part of the election campaign from both parties is an on-going deterrent from honoring their agreement. In addition, the Chinese will argue that the world has changed since the February agreement. The collapse and rebound in oil prices, combined with the onset of the pandemic, has thoroughly upended trade relations not just between the U.S. and China but throughout the globe.
The Chinese have a point, but my suspicion is that U.S. negotiators will be in no mood to forgive and forget (at least not publicly). Besides, we have bigger fish to fry at the moment. The Trump Administration continues to blame the coronavirus outbreak on the Chinese government, hinting that the outbreak might have been on purpose. While it is true that the virus originated in Wuhan, China, there is no evidence that the Chinese government was involved in its origination or spread. But facts have never stopped your president from voicing his opinions.
The security crackdown and new legislation by China on limiting Honk Kong democratic freedoms has also earned China condemnation and sanctions from both sides of the political aisle here at home. There has also been a tit-for-tat shutting of consulates in both countries as a result of U.S. accusations that the Chinese consulate in Houston was a hotbed of spying.
But the latest flare-up involves TikTok, a Chinese-owned video platform loved by more than 50 percent of America's teens. ByteDance, the app's parent company, has been notified by the White House that it has 45 days to reach a deal to sell its U.S. business. This follows on the heels of a growing list of Chinese tech companies that have been blacklisted by the Trump Administration. These actions have created a furor across Asia and within China.
The Chinese accuse the United States of forcing a fire sale of TikTok by slapping on this a time limit, while arguing that America's growing tech war with China is violating international rules of trade. To make matters worse for the Chinese, U.S. Secretary of State, Mike Pompeo, warned that "countless Chinese apps" may be in for similar treatment in the coming days.
I believe that while China may have been willing to negotiate trade imbalances with the U.S. over the last four years, they have dug in their heels when it came to modifying intellectual property rights and technology transfers. The U.S.'s willingness to wait, and negotiate in good faith appears, at this juncture, to have been an unworkable strategy.
I suspect that our newfound willingness to wage a tech war as a way of bringing China to the table, where serious discussions can begin in these areas, will not be taken lightly. While necessary, we should not expect China to simply lie down and take it. I expect a strong response in the immediate future, and so should you. Be prepared.
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@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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