@theMarket: Market's Window Getting Smaller
This week the benchmark S&P 500 Index made a minor new high for the year. While that is cause to celebrate, the question to ask is how much further can we climb in the face of a slowing economy before suffering a meaningful pullback?
Over the last few months, investors have been warned by just about every economist worth their salt that the country needs another jolt of federal stimulus. It has not happened. You can cast blame on whomever you want for that failure, but none of that matters to the over one million American workers who lost their jobs in the past week.
Even the Federal Reserve Bank, in releasing its July 28-29 Federal Open Market Committee meeting notes, expressed concern over the future of the economy. The members warned investors that the coronavirus would likely continue to stunt growth and potentially pose dangers to the financial system. They too have been urging the government to add more fiscal stimulus to the equation.
The longer it takes for Congress to respond to this urgent need, the smaller the window becomes for the market’s continued advance. Right now, most observers do not expect even a "skinny" stimulus deal to be passed before September at the earliest.
When thinking back to the financial crisis of over a decade ago, I recall it took a fairly substantial decline in the averages to convince the politicians to take action. Could that happen again? Unfortunately, some of the conditions for just such a response are present.
As I mentioned, investors have regained all their market losses and are now basically even for the year. At the same time, valuations are stretched, given the present recessionary state of the economy. Investors have paid scant attention to fundamentals during the pandemic. Companies have been given a pass even though they have been reporting horrendous sales and earnings results, but at some point, they may matter again.
It was more than interesting that the markets and gold sold off on Wednesday after the FOMC notes were released. Remember, the financier markets have been wholly dependent on the Fed to bail them out ever since the March bottom. Therefore, when the Fed publicly states that they are worried about the future, markets pay attention.
If we look at the most recent U.S. Advisors Sentiment for this week, we find that bullish sentiment (usually a contrary indicator) is at their highest level (59.2 percent) since mid-January of 2020. What's more, the spread between bulls and bears is at 42.7 percent. That number exceeds the spread in mid-January. Numbers like that are a warning sign to prepare for some kind of downdraft in the stock market. It may not occur this week, or next, but usually one can expect a sell-off within a month or so. And while these are different times and circumstances, I think readers would do well to pay attention to indicators like this.
By the way, my apologies for last week's column. I had expected a trade meeting between Chinese and U.S. officials last weekend, but it was postponed shortly after my column was published. Evidently, the meeting is now back on track, although no date has been set for the virtual review of the Phase One trade deal. However, if anything, the tension between the two parties have increased since then, so I will be paying close attention to the outcome of that meeting.
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The Retired Investor: Home Is Where the Hammer Is
Remember those promises of how you were going to finish that deck, remodel the kitchen, or fix that faucet? Well, this year, many Americans finally stopped procrastinating.
It appears that there is at least one silver lining in this pandemic: a boom in home improvements. Take my brother-in-law, for example. He lives in a Maryland suburb with his wife and extended family, which consists of three adult children, plus a bunch of grandchildren. Faced with working from home, the entire family embarked on a do-over to their back yard. During the last few months, they installed an above-ground pool, built a gazebo, and purchased outdoor patio furniture. Since then, the back yard has become the center for family recreation and entertainment.
Travel up the coast to my daughter's home on the Long Island Sound, where DJ "Ming," (who also happens to be my son-in-law, Aaron) converted the family's small guest house into his recording studio. He also built, with the help of my daughter and their young children, an outdoor vegetable garden, replaced the kitchen faucets, and re-wired and laid new internet cable throughout the house and his new studio.
These are just two examples of the do-it yourself frenzy that has occupied millions of Americans over the past several months. Is it any wonder that Home Depot just reported that their same-store sales have exploded, spiking 25 percent? Lowes reported similar results with comparable store sales surging 35 percent.
Families with time on their hands and stuck at home finally tackled those long-delayed, home improvement projects, either by themselves or by hiring contractors. Demand for hardware, paint, tools, lawns and garden goods, and treated lumber have gone through the roof. It seems that over the last few months, Americans spent their time hammering nails, according to a recent survey from Porch.com, a remodeling platform. Their findings indicated that three quarters of those surveyed said they had done some kind of home improvement project during the pandemic. Homeowners with time on their hands began to update or reconfigure both indoor and outdoor spaces for exercise, work, school and recreation. Underlying this trend is the assumption that the coronavirus may be with us for some time to come.
In addition to home improvements, more employees are also working from home. Like me, they may have started working remotely on their kitchen counter or dining room table, but for most that has become unmanageable. As a result, the demand for home office space has also increased.
Prior to the pandemic, less than half of all homes boasted a remote working space. And yet, a survey conducted by YouGov, in partnership with USA Today and LinkedIn, found that 74 percent of professionals age 18 to 74 said they were now working from home. What most have discovered is that establishing a new home office is both time-consuming and expensive. Upgrading existing space, basement waterproofing, attic or bedroom refinishing, in addition to office furniture and the need to wire (or re-wire) and install internet cable, can break a budget very quickly.
Whether or not the home improvement phase subsides in the second half of the year will depend largely on the virus. During the winter months, the outdoor projects will most certainly taper off. But if home sales rebound (and they look like they may), then spending on remodeling, especially bathrooms and kitchens, may continue to gain for a few more months.
Of course, the wild card is how long the pandemic will last, and what additional impact it will have on the overall economy and employment. Analysts expect that without a new stimulus bill to cushion the blow, most consumers will temper their spending overall, until they see which way the wind blows. If so, at least we can all take some satisfaction in a job well done.
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@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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