@theMarket: Markets Reach for the Sky
Credit the Fed for this week's bump up in the averages. Technology shares led the charge as usual, shrugging off a sinking economy, higher unemployment and no progress on another bail out. What else is new?
At the annual Jackson Hole Symposium of world central bank leaders, conducted virtually this year, Jerome Powell, the chairman of our central bank, took center stage. In his prepared remarks, Powell announced a shift in the U.S. inflation policy. Rather than using the oft-stated, long-held inflation target of 2 percent, the Fed will now "seek to achieve inflation that averages 2 percent over time."
What's the big deal, you might ask? In laymen's terms, if inflation rises above 2 percent for some period of time, the Fed now will sit on its hands, instead of taking action preemptively to slow the economy and douse inflation.
Of course, he stated all the usual caveats about taking action if inflation were to run too hot, but reminded us that the Fed has not been able to get the inflation rate up to 2 percent in well over a decade. Inflation remained low, even when unemployment dropped to 50-year lows, he explained, instead of the opposite, which was what most experts expected.
The Fed believes that the markets are convinced that inflation won't ever get any higher than 2 percent because of past Fed policy. In which case, interest rates should stay low and maybe go lower still. That is the conundrum the Fed believes the markets and Fed policy find themselves.
A way out, they believe, is to be more flexible in targeting inflation in the future. If investors are no longer exactly sure how high the inflation rate might go. Before the Fed acts, it may break down some of the deflationary psychology that permeates the markets. Unfortunately, their policies thus far have resulted in what I call "bad" inflation. Asset prices such as gold, housing prices, and the stock market have seen huge price increases. But "good" inflation, as represented by wage growth, for example, has gone the other way.
One bit of good news was that the China/U.S. trade talks turned out to be a non-event. I guess the administration has bigger fish to fry at the moment. The RNC convention this week was a four-day affair. In addition, the White House attempted (but failed) to get the stimulus bail-out talks re-started between the two parties. In any event, the market believes that a sale of TikTok, the Chinese-owned company in the administration's cross hairs, will be sold shortly to any one of a number of American bidders.
In the meantime, I have not changed my view that over the next few weeks stocks should pull back. Investor sentiment, already in the danger zone, has risen even further last week. The fear index, called the VIX, bears watching as well. Over the last few days, while the stock market continued to climb, so did the VIX. Usually, the opposite occurs. It is just another sign that the frothiness of the market needs to be reined in for the time being.
I also expect the election campaign to begin in earnest after Labor Day. It usually ushers in a period of uncertainty through November, when the race is this close. Markets, as you know, do not like uncertainty. And judging by the tone of both party's conventions, I expect the level of vitriolic debate will stun us all.
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The Retired Investor: The Drive-In Returns
There is not much good one can say about the coronavirus, but if one looks hard enough there are a few silver linings. One of which is the revival of the drive-in theater.
Cinemas have been closed for months, thanks to COVID-19, and are only now re-opening to limited audiences. In the meantime, consumers have been surviving on streaming movies and television series for entertainment. However, one bright spot for those who can take advantage of it has been the drive-in theater.
It is well-suited for a country in pandemic, and ready made for social distancing. At many drive-ins, autos are parked at least 6 feet apart. Ticket-holders do not need to wear a mask as long as they stay in their cars. If you want snacks, your food is brought to you. In a society that is just aching for a night out, the drive-in offers family entertainment in a safe, responsible setting. What more could you want?
Usually, I'm not one for nostalgia, but I make an exception when it comes to drive-ins. The drive-in is a uniquely American invention first established in Camden, N.J., back in 1933. It was the brainchild of the manager of a sales parts store, Richard Hollingshead. Over the next three decades, the concept caught on, driven also by the invention of audio speaker technology for in-car use in 1941.
By the time I was 10 years old, back in 1958, drive-in theaters hit their peak with more than 4,000 locations in the U.S. Living in Pennsylvania, it became a staple of my family's weekend entertainment. In the Sixties, when I became old enough to drive, it was also my favorite date-night activity. It sparked some of my steamiest teen-age romances.
Since then, the number of drive-in theaters has dropped by 90 percent. A combination of factors caused the demise of my favorite pasttime. The VCR, DVDs, and finally the advent of streaming took over as consumers could increasingly watch the same movie entertainment from their couches at home. If you felt like going out, the invention of giant multiplexes in every shopping mall was an irresistible draw for shopping, dinner, and then a movie. Finally, rising land costs made selling properties for development much more profitable than charging tickets to dwindling crowds at the neighborhood drive-in.
Today, according to the United Drive-in Theatre Owners Association (UDITOA), there are only about 300 of these institutions left, with my home state, Pennsylvania, and New York sharing the top spots with 28 each. The fact that owners are showing the movies of yesteryear, like "Harry Potter," "Goonies," and "Jurassic Park" just adds to the nostalgia.
Could drive-ins, ex-pandemic (if there will be such a thing), still survive? Some companies are betting they could. Walmart, for example, intends to transform 160 of its car parks into drive-in theaters in partnership with Robert De Niro's Tribeca Enterprises. Drive-ins could provide a new use for America's brick and mortar mall space. Similar efforts are underway in South Korea and Germany where drive-ins have become popular. Drive-ins may have some good things going for them as well.
Indoor movie theaters, for example, could transform their parking lots into outdoor venues. Technology, in the form of FM and Bluetooth transmissions can easily convert into stereo sound through any car speaker system. In addition, today's high-quality HD and 4K movies would work well projected on the giant drive-in screens.
From a marketing point of view, enterprising owners could bring back the double, or even triple features to moviegoers. Marathon movie nights might also be popular. Retro and nostalgia fans, as well as those too young to remember all the Harry Potter, Star Wars, or Indiana Jones movies, might be popular.
I remember that at some point, drive-ins also featured live entertainment, bands, and even playgrounds and petting zoos. Who knows what the entrepreneurs of the future might come up with? The point is that times are changing and sometimes we might want to look to the past for answers to today's issues. I for one am hopeful that drive-ins do make a comeback.
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@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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