@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.
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The Retired Investor: Next Bailout Should Address Job Creation
As the COVID-19 virus rages across the nation, Americans are hoping for more assistance from the government on a variety of fronts. So far this month, their hopes have been met with a resounding silence from the White House, although members of Congress are trying to come up with answers that both parties can agree upon. I have a couple of suggestions.
The first round of fiscal and monetary stimulus did a good job in addressing the huge spike in unemployment the country has suffered. While the CARES Act at $2.2 trillion provided $500 billion to distressed industries, almost $350 billion in loans to small businesses and $4100 billion to hospitals, it was the $200 billion in additional unemployment benefits and $300 billion in stimulus checks to individuals that got the most attention.
The PPE, the additional $600 a month in unemployment benefits (which is set to sunset soon), the direct payments to taxpayers, plus the Fed's actions in the credit market, did wonders in alleviating the worst impact of the country's economic shut down.
The challenge we face this time around is twofold, in my opinion. We need to continue to help those who have been out of a job, as well as the thousands of workers who are now being laid off as the virus cases delay business re-openings in over half the country. We also need to incentivize those businesses that are struggling to remain open to rehire workers in this period of uncertainty and do more to help small businesses that are facing bankruptcy.
Exactly how to do that in an election year, when neither Congress nor the White House can agree on anything, is a tall order. As in so many things lately, the failed leadership in Washington leads me to look elsewhere for suggestions.
This week the United Kingdom's finance minister, Rishi Sunak, announced, as part of a mini-budget, some novel ideas to save jobs, help Britain's youth find work, and bolster the nation's restaurants. Some of those measures might work here as well.
The UK government, in response to the pandemic, is already paying up to 80 percent of salaries for about nine million workers under their own furlough scheme. That program will begin to wind down by August. But in preparation for the end of that plan, the government is offering more than $1,000 to firms who take on workers, including all those who had been laid off due to the pandemic. They are also spending an additional $2 billion-plus to subsidize the hiring of 16- to 24-year-olds.
Green grants for households and public sector buildings (including hospitals), to make them more energy efficient, are also in the works. As an added incentive, the tax on home purchases will be waived for those thinking of purchasing a home under $500,000.
Restaurants, both here and abroad, are suffering mightily from the virus. The government, in an effort to encourage consumers to go out and buy a restaurant meal, are giving consumers a $12 discount per meal through the month of August.
Most economists on Wall Street think it is a foregone conclusion that a second stimulus package is not only needed, but will pass no later than August. In an election year, both parties want to look like they are helping those in need.
At the same time, the recent surge in virus cases, and the delays in reopening the economy that COVID-19 is causing, makes a second package vital to the future health of the nation. Remember too, that the planned end of enhanced unemployment benefits at the end of this month could cause a drastic increase in delinquencies in consumer-sensitive, financial areas such as mortgage, auto, and commercial loans.
I would expect, therefore, that both the unemployment benefits and another direct payment to certain Americans under a certain income level will be part of CARES Act II. This time, however, I expect the additional unemployment benefits could be reduced, while some kind of going-back-to-work bonus, awarded over a specific time period, might be part of the plan.
If this is coupled with a UK-style payout to the hiring firm, it could tip the scales and stem further job losses. In the small business area, the extension of the PPE program is needed at a minimum, with intense focus and more funds funneled to small and tiny Mom and Pop enterprises. We could expand the UK's restaurant discount idea to all of our service industries. This could easily be accomplished by simply eliminating sales tax on all goods and services for a certain time period.
In any case, I am sure that we could all come up with ideas that might work in getting the economy going again. If you have one, send it to me, and I will do my best to print as many as possible.
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@theMarket: Markets Celebrate Fourth of July
The continuing gain in jobs cheered equity markets on Thursday, just before the holiday weekend. Given the surge in virus cases in more than half of the United States at the same time, some investors were dumbfounded. They just don't get it.
The nation added 4.8 million jobs in June, which was better than expected. It was the second month in a row that the employment data surprised investors by beating expectations. Remember, however, that this data is backward looking. The bounce back in the economy as a result of re-opening businesses resulted in these upside labor surprises. Readers should expect those employment gains to moderate next month for some obvious reasons.
Topping the list is the massive upsurge in virus cases in those states that chose politics over lives. The pandemic has slowed many state plans to re-open their economies and will impact future growth as well as further employment. I suspect this three-day weekend will damage the American comeback even further, unless the nation actually listens to the advice of medical experts.
In the meantime, I've spent most of the week explaining to clients and readers why I have maintained my bullish stance throughout the last several months. It comes down to my view on the future of the economy and the stock market. There are three main schools of thought on how the economy will weather this pandemic.
There are those who believe a "V" shaped recovery is in the offing. These are mostly politicians and investors with their eye on November's elections. Then there are those who think we will see a "U" shaped gradual pickup that will take longer to accomplish. Finally, there is a group who believe we will see a "W" type recovery, where the big decline in March is followed by a sharp recovery (like what we are experiencing now), only to fall back again before finally rising out of the chaos.
If you look at all three cases, what do you see? In every case, the direction of the right side of each of these letters is going up. From my perspective, that is all you need to know. Will the restoration of jobs and the economy require six months, 12 months, or even 18 months? No one really knows, because no one can game the virus without a vaccine. Whether the economy takes a longer or shorter time period to get there, it will still recover, and so will your investments.
There are several promising vaccines in the works worldwide. In some cases, such as one Chinese version (that is already being administered to their army), the chances of success should be known sooner than later. Several drug companies are expected to provide further information on their vaccines in the fall. A successful drug would be a gamechanger, not only here in the U.S. but for the economies worldwide. In which case, the "V" might be the preferred choice.
Thanks to the massive stimulus provided by the government, the last quarter in the stock market was one of the best since 1998. And the stimulus is expected to continue fueling further gains in the financial markets. While I still expect markets to have their ups and downs, hang in there, because better days are coming if we all use our common sense.
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The Retired Investor: Big Banks & Big Brother
It is an interesting time for bank stocks. In the aftermath of two federal regulatory actions last week, the money-center banks are becoming more public than private institutions.
First the good news. Federal banking regulators announced that they are relaxing provisions of the Volcker Rule, which was an important part of the Dodd-Frank Act of 2010. Readers might recall that act was passed in the aftermath of the financial crisis. It was meant to prevent another "too big to fail" scenario within the nation's banking system.
A key provision of the act prevented banks from using their own funds to invest in risky assets such as derivatives, options, private equity, and hedge funds. Those rules have been essentially relaxed, allowing large banks a wider latitude in what they can invest in. Margin requirements (at least in some areas) such as in swap trades, have also been eased.
The long and short of it is that banks have been allowed to once again travel the road of riskier investments. The lowering of margin requirements will also free up $40 billion in capital that banks can now use in proprietary trading. This turn of events might be troubling to those of us who remember the worst crisis since the Great Depression in this country.
But what Big Brother giveth, he can also take away. Last Thursday, the Federal Reserve Bank released the results of its annual stress test of the 34 largest banks in the U.S. Stress tests are another regulatory change that was implemented by the federal government as a result of the financial crisis. They are meant to ensure that the United States banking system can withstand shocks to its capital base.
The COVID-19 pandemic and its impact was the focal point of the regulatory authorities test this year. All 34 banks passed the minimum capital requirements necessary under these circumstances, although in the worst-case scenario regulators said "several would approach minimum capital levels."
That's the good news. The bad news was the Fed also ordered the banks to limit shareholder payouts and suspend repurchases of their stocks during the third quarter. Dividend distributions will be limited to the levels banks paid out in the second quarter.
While the news initially surprised investors, banking stocks have gained ground since the announcements. That should not surprise you, given the steady encroachment by the Federal Reserve Bank and the U.S. Treasury into the private sector since the beginning of the pandemic. The fact that banks have increasingly operated under the thumb of government has been going on for the last decade. It is one explanation for why the sector as a whole has consistently underperformed other areas of the stock market.
One might question where and when will this creeping nationalization of the private sector economy come to an end. The Fed is already purchasing bonds from companies such as Verizon on the open market as well as bond funds and exchange traded funds. Will stocks be next?
Today, the government announced a $700 million loan to a major trucking company, YRC Worldwide Inc., in exchange for an equity stake of 29.6 percent. In the name of the great pandemic, as companies become increasingly distressed, I believe more and more of the economy will come under the control of the government. The question to ask is then what?
As I have maintained, I fear we are fast transforming from a quasi-capitalistic economy into something that resembles Europe's economic socialism, or even China's centralized economy. It appears we have no say in the matter. Is it that our free market system has become an antiquated idea and has no place in today's global economy? That is for you to decide.
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@theMarket: The Virus Versus the Fed
Bulls and bears are in a tussle. Market averages reflect the battle that is moving stocks down, up, and then sideways throughout the week. It is a phase where investors are in a data-dependent mood and the data isn't all that good.
The bears are watching the COVID-19 cases climb higher every day, which threatens to trash their expectations for a "V" shaped recovery. The bulls, meanwhile, aren't too worried. They are banking on the Federal Reserve Bank's promises to keep pouring added stimulus support into the financial markets just in case the virus pushes the economy further toward the brink.
It did not have to be this way.
A few months ago, America had a chance to beat this pandemic. That was before the president decided to politicize the virus, pretend it wasn't serious, and then fumble the response when he realized it was. Now, with the number of new virus cases hitting the highest level since the onset of the pandemic in America, he chooses to simply ignore it.
We are left holding the bag. However, readers are also aware that the American people are not blameless. For weeks I have been warning that the general disregard for following medical guidelines among the public was likely to produce the present results. When our politicians encourage this behavior, and even support gun-toting radical groups to storm state houses, this is what you get.
Twenty-seven states (and counting) have witnessed an increase in COVID-19 cases. The worst hit among them followed the president's urgings to re-open, downplay the risks, and get the economy moving again before the election. New York Gov. Andrew Cuomo, who has paid his dues combatting the worst outbreak in any American state, said it best. "You played politics with this virus, and you lost."
So, what happens now? Most likely, we get a few more rounds of positive economic data points, such as stronger retail sales, higher manufacturing numbers, etc., but those are "rebound" numbers from a low, low base. After that, the data will look less rosy and may even decline, if the virus numbers increase and begin to spread outward from hotspots in the West and Southeast.
The economy, as we know by now, is not the stock market. The stratospheric levels of the indexes are all about Fed stimulus. The thinking here is that as long as the helicopter money is still raining down from a central bank sky, buy stocks. Fundamental news, such as the results of yesterday's stress test by the nation's large banks, which at one time would have been important, has little to do with what happens to their stock prices.
Speculation in the markets by new retail investors, stuck at home, and trying to make money day trading, adds another unpredictable element. It is their buying, for example, that is bidding up the stocks of bankrupt companies, like Hertz and GNC, or chasing unproven "story" stocks at a few cents a share to see them double or quadruple in a day, or a week. My advice is buyer beware if you are trying to play that game, because they almost always end badly.
June is almost over, and I expect there will likely be more turbulence early next week. There is some talk of a large end-of-quarter rebalancing among institutions from stocks to bonds, after the strong equity gains this past quarter. That could cause some additional selling, maybe another 100-point risk to the downside in the S&P 500 Index.
However, contrarian indicators, such as bearish investor sentiment, and high short interest on the S&P 500 Index, plus expectations of another massive fiscal stimulus bill next month, would indicate that stocks are still in a bullish phase. Last week's advice, therefore, to "buy the dips" remains in place.
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