Investors weren’t happy with central banks last week.
After the Federal Open Market Committee (FOMC) meeting, Federal Reserve Chair Jerome Powell confirmed the economy is recovering more quickly than anticipated:
“With the reopening of many businesses and factories and fewer people withdrawing from social interactions, household spending looks to have recovered about three-quarters of its earlier decline…The recovery has progressed more quickly than generally expected, and forecasts from FOMC participants for economic growth this year have been revised up since our June Summary of Economic Projections. Even so, overall activity remains well below its level before the pandemic and the path ahead remains highly uncertain…We remain committed to using our full range of tools to support the economy in this challenging time.”
Investors weren’t satisfied. Colby Smith of Financial Times reported stocks, “sold off sharply during Mr. Powell’s press conference on Wednesday, and again on Thursday,” because the FOMC did not provide information about “how it might adapt its balance sheet policy to generate…inflation and aid the U.S. economic recovery.”
The Bank of England (BOE) also delivered news that unsettled markets last week. Minutes from the BOE’s latest meeting noted it was studying negative interest rates. Some banks and analysts interpreted this to mean the bank intends to implement negative rates. Eva Szalay and Chris Giles of Financial Times reported, “People familiar with the matter said the preparations now under way were aimed more at fully understanding the effects of negative rates, rather than at seeking to implement them.”
It’s possible the BOE wants to better understand negative rates so it’s prepared for a worst-case scenario, such as the economic impact of COVID-19 containment measures combined with failure to reach a trade agreement with the European Union (EU), reported David Goodman and Lucy Meakin of Bloomberg. The EU trade deadline is fast approaching and, currently, no deal seems likely.
In the face of uncertainty, markets are likely to remain volatile.
Last week, the Nasdaq Composite Index set another record.
So far, 2020 has been memorable for many reasons, not the least of which is the incredible speed at which some events have been occurring in financial markets. This year, we’ve experienced:
Last week, we witnessed the swiftest correction on record as the Nasdaq fell by 10 percent in just three days. By the end of the week, the Index had recouped some losses and finished down 4.1 percent. The Standard & Poor’s 500 Index and Dow Jones Industrial Average also finished the week lower.
It would be gratifying if the recent drop in share price steadied U.S. stock markets. However, we are likely to see stocks remain volatile through the end of 2020. The Economist explained:
“Because of the influential role of turbocharged retail investment, prices can be expected to remain choppy. Moreover, the market is entering a period where typical COVID-19-related volatility may be exacerbated by the twists and turns of America’s presidential election.
“That said, much of the tech recovery from the lows in March was rooted in fundamental shifts, like policy interventions, or pandemic-prompted changes to consumer behavior, such as online shopping, that have helped firms…Even if the giddy obsession with tech firms exhibited during the summer fades, there may be little reason for investors to throw in the beach towel yet.”
This is a good time to take a gut check and make sure your asset allocation aligns with your financial goals and your response to market volatility.
Stock markets in the United States retreated a bit last week.
U.S. stocks have been trending higher for months. Last week, they gave back some gains. The Nasdaq Composite dropped 3.3 percent, while the S&P 500 Index fell 2.3 percent, and the Dow lost 1.8 percent, reported Ben Levisohn of Barron’s.
It was difficult to pinpoint a specific reason for the market’s retreat. Levisohn offered a litany of possibilities that included:
The downturn could also have something to do with the Congressional Budget Office report on U.S. debt levels. Next year, our country is expected to owe more (government debt) than it produces (gross domestic product or GDP). By 2023, the U.S. debt-to-GDP ratio is estimated to be 107 percent, which would be the highest in our nation’s history.
A high debt-to-GDP level, typically, is bad news for economic growth. The World Bank has found countries with debt-to-GDP ratios that exceed 77 percent for extended periods of time, see significant slowdowns in economic growth, reported Will Kenton and Julius Mansa in Investopedia. U.S. debt-to-GDP has been above 77 percent since 2009, according to data from the St. Louis Federal Reserve.
Michael Mackenzie of Financial Times cautioned ultra-loose central bank monetary policy and enormous government spending can have unwelcome side effects. He cited an emerging markets strategist who argued, “…excessive stimulus and easy money policies led either to asset bubbles or a burst of inflation. Both outcomes ‘bode ill for share prices in the long run.’”
On the other hand, Mackenzie says, “Given the current U.S. policy mix that penalizes investors sitting on the sidelines and holding cash – given they are earning next to nothing in interest – any cooling of a red-hot market is easily framed as an opportunity. For many, it is another chance to ‘buy the dip.’”
We’ll see what happens next week.
Guidance Wealth will be closed Monday, September 7th for the Labor Day Holiday
The stock market rallies like it’s 1986.
August has been a good month for stock investors. At the end of last week, the S&P 500 Index was up 6.8 percent for the month. The Index is poised to deliver its best returns for the month since 1986, when it gained 7.1 percent, reported Financial Times.
The performance of U.S. stock markets is remarkable, in part, because, so far, company earnings – the profit that publicly-traded companies earn and report each quarter – haven’t been great in 2020. Earnings were down 31.9 percent during the second quarter of the year, reported FactSet. The decline in earnings reflected the impact of coronavirus closures.
Weak second quarter earnings had little impact on U.S. stocks, however. Instead, investors appeared to focus on ‘upside earnings surprises.’ That term is used to describe companies with earnings that exceed analysts’ expectations. During the second quarter, 84 percent of companies in the S&P 500 beat analysts’ estimates.
FactSet reported other factors have been cited to explain the upward trajectory of stock markets, as well. These include:
The list should also include the Federal Reserve’s strategy for inflation and employment, which was announced last week. Randall Forsyth of Barron’s reported:
“In practical terms, the central bank’s current policy of near-zero interest rates and heavy purchases of Treasury and agency mortgage-backed securities will continue as long as unemployment remains elevated. The chasm between a Wall Street at record levels and a Main Street in a near-depression will persist as a result.”
Last week, the Standard & Poor’s 500 and Nasdaq Composite Indices chalked up a fifth consecutive week of gains, while the Dow Jones Industrial Index moved into positive territory for 2020.
Guidance Wealth will be closed Monday, September 7th for the Labor Day Holiday
The shortest bear market in history is over.
The Nasdaq Composite and Standard & Poor’s 500 Indices finished at new highs last week. The stock market is considered to be a leading economic indicator, so strong stock market performance suggests economic improvement ahead.
There was a caveat to last week’s gains, though. One large technology company was responsible for 60 percent of the S&P’s weekly gains (0.7 percent), reported Ben Levisohn of Barron’s. The same large company is also a component of the Dow Jones Industrials Index, which finished the week flat. Without that stock, the Dow would have finished the week lower. Levisohn wrote:
“The S&P 500 might have hit a record last week, but most stocks have been having bad days. On Friday, for instance, just 220 stocks in the S&P 500 closed higher for the day, and that was far from an anomaly. The S&P 500’s cumulative advance/decline line – a measure of the number of stocks finishing higher versus those finishing lower that technicians use to gauge the market’s underlying strength – has been falling even as the S&P 500 progressed to a record.”
One reason for the U.S. stock market’s rise to date may be dividends, reported Lawrence Strauss of Barron’s. “…equities remain attractive relative to 10-year U.S. Treasuries. The yield on that bond was recently at 0.67 percent, about one percentage point below the S&P 500’s yield.”
The story told by last week’s jobs data was as uncertain as the one told by the U.S. stock market. The Department of Labor reported jobless claims moved higher with 1.1 million people filing new claims for the week of August 15. During the previous week, new claims had fallen below one million. The four-week moving average for new claims continued to trend lower.
The unemployment rate dropped from 10.6 percent to 10.2 percent. That’s an improvement over April’s 14.4 percent, but the rate remains historically high. As a point for comparison, during the Great Recession, the unemployment rate peaked at 10.6 percent in January 2010, according to Rakesh Kochhar of Pew Research Center.
There was also a decline in the number of jobs posted. (Job postings provide insight to labor market activity in real time.) The Indeed Hiring Lab reported postings were down more than 20 percent year-over-year as of August 14, 2020. It was the first decline in the number of job listings since April 2020. Fewer jobs were available in hospitality, tourism, childcare, banking, finance, and software development.
The Standard & Poor’s (S&P) 500 Index finished the week within a whisker of its February high, reported Randall Forsyth of Barron’s.
It’s a remarkable feat. The stock market has recovered in just 175 days. Historically, comparable recoveries (those following market drops of 20 percent or more) have taken about four years, reported Vildana Hajric, Lu Wang, and Claire Ballentine of Bloomberg Quint.
“The sharpness and speed of the downturn – and the immediacy of the overwhelming liquidity and fiscal response from the Federal Reserve and Congress – forestalled the kind of grinding, purgative action of typical bear markets, which wrings out excesses and resets valuations lower. There was also not the shift in market leadership that usually occurs in the crucible of a bear market,” reported Michael Santoli of CNBC.
The recovery is also remarkable because it occurred in the midst of a recession (that some have labeled a depression) and during a period of extraordinarily weak corporate earnings. It’s possible investors are focusing on the fact economic and earnings data has been ‘better-than-expected.’ For instance:
Last week, in a paper titled Reasons (Not) To Be Cheerful: Certainty, Absurdity, and Fallacious Narratives, GMO’s James Montier wrote, “Never before have I seen a market so highly valued in the face of overwhelming uncertainty. Yet today the U.S. stock market stands at nosebleed-inducing levels of multiple, whilst the fundamentals seem more uncertain than ever before.”
The bottom line is the economy and company profits have contracted sharply while stock market valuations have rocketed higher. The sonic boom of performance startled many market professionals. Strategists tracked by Bloomberg expected the S&P 500 to finish December at 3,117 or about 8 percent lower than it started. They may be wrong, but they may be right. No one is certain what lies ahead.
There was good news and bad news in last week’s employment report.
The good news was the U.S. Bureau of Labor Statistics delivered better-than-expected data about employment. In July, the U.S. economy added about 1.8 million new jobs.
That’s about 300,000 more than the Wall Street consensus forecast, according to Jeff Cox of CNBC, who reported, “…there were wide variations around the estimates as the pandemic’s resurgence dented plans to get the shuttered U.S. economy completely back online. Forecasts ranged from a decline of half a million jobs to a rise of 3 million…”
The flip side of employment is unemployment. The U-3 unemployment rate, which reflects unemployed people who are actively seeking a job, declined in July. It has moved steadily lower during the last few months, from 14.7 percent in April to 10.2 percent in July. The U-6 rate, which includes unemployed, underemployed, and discouraged workers, has declined from 22.8 percent in April to 16.5 percent in July.
The bad news is that, despite declining unemployment numbers, the U.S. unemployment rate is now at 10.2 percent – a level that rivals unemployment during the 1981-82 recession and the Great Recession. On Friday, Matthew Klein of Barron’s explained:
“The July data were better than feared, but that doesn’t mean the U.S. economy is in good shape. The danger now is that the private sector’s slowing momentum will be exacerbated by ongoing state and local government retrenchment and the expiration of emergency unemployment benefits that had been supporting disposable income.”
It is possible emergency unemployment benefits will restart before Congress reaches agreement. On Saturday, President Trump issued an executive memo authorizing enhanced unemployment benefits of $400 a week. Three-fourths of the amount would be paid for with disaster relief funds. Regular unemployment benefits plus one-fourth of the emergency benefit would be paid by states.
It is also possible benefits won’t restart until Congress reaches agreement. “Although [President Trump] signed an order to provide enhanced unemployment benefits to millions of out-of-work Americans, it’s unclear if he has the authority to do so by executive order while side-stepping Congress. And, it could take months for states to implement,” reported Jessica Menton of USA Today.
Major U.S. stock indices finished higher for the week.
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Last week delivered a mixed bag of financial and economic news.
As many expected, the U.S. economy did not fare well during the second quarter. COVID-19 lockdowns and business closings caused productivity to fall by one-third. Real gross domestic product, which is the value of all goods and services produced by our country, dropped 32.9 percent during the second quarter of 2020, reported the Bureau of Economic Analysis. During the first quarter of the year, productivity fell by 5 percent.
The Federal Reserve held its Federal Open Market Committee meeting last week. Fed Chair Jerome Powell committed to “…using our tools to do what we can, and for as long as it takes, to provide some relief and stability, to ensure that the recovery will be as strong as possible, and to limit lasting damage to the economy.”
Powell also said, “Elected officials have the power to tax and spend and to make decisions about where we, as a society, should direct our collective resources. The fiscal policy actions that have been taken thus far have made a critical difference to families, businesses, and communities across the country. Even so, the current economic downturn is the most severe in our lifetimes.”
Our elected officials were unable to reach an agreement about how to support unemployed Americans whose jobs disappeared because of COVID-19. Enhanced unemployment benefits and a moratorium on evictions both expired at the end of last week. Congress met over the weekend and officials indicated they had made progress in negotiations, reported The Washington Post.
Earnings offered a glimmer of positive news for investors. Al Root of Barron’s reported, “…companies are crushing overly bearish estimates…More than 300 [Standard & Poor’s 500 Index] companies have reported second-quarter numbers so far. About 85 percent are beating Wall Street earnings estimates by an average of 22 percent.”
Overall, blended earnings for the Standard & Poor’s 500 Index (S&P 500) has declined 35.7 percent. If that is the actual change in earnings for the second quarter, it would be the biggest year-over-year decline since the fourth quarter of 2008 when earnings dropped 69.1 percent.
The S&P 500 and the Nasdaq Composites both gained last week. The Dow Jones Industrial Index finished the week lower.
Where are we on vaccines and treatments?
During 2020, the United States government has spent more than $13 billion on Operation Warp Speed (OWS), which is focused on accelerating the development of vaccines and treatments for COVID-19, according to The Economist. The United States is not alone. Governments around the world are funding similar research.
The Economist reported, “…with the eagerness of the pharma sector to find treatments, along with the broad range of investments made by OWS (as well as other governments), there has been a lot of progress in the search for tests, drugs, and vaccines…Even the master of caution on vaccines, Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, thinks a signal of vaccine efficacy might arrive in September.”
Any progress on treatments and vaccines is welcome news. Last week, there were more than 4 million confirmed COVID-19 cases in the United States, and the number of deaths rose above 1,000 a day, reported Joe Murphy and colleagues at NBC News. Late in the week, the number of new cases in Arizona, Florida, and South Carolina appeared to be trending lower, according to data from the Coronavirus Research Center at Johns Hopkins.
The resurgence of the virus may be one reason for the decline in U.S. stock markets last week. The Nasdaq Composite Index delivered back-to-back losses for the first time in more than a month, while the Dow Jones Industrial Average and the Standard & Poor’s 500 Index finished the week slightly lower, reported Ben Levisohn of Barron’s.
It’s difficult to pinpoint the exact cause of the drop because there were many possible drivers. For instance, the Department of Labor reported the number of new unemployment claims increased, after 15 weeks of declines. Markets may have been concerned about increasing unemployment numbers when the extra $600 in weekly unemployment benefits expires at the end of this week. Congress has yet to agree on whether or how to extend benefits.
In addition, earnings have been less than stellar – as expected. Last week, 26 percent of companies in the Standard & Poor’s 500 Index had reported second quarter results. The blended earnings, which combine actual results for companies that have reported with the estimated results for companies that have not yet reported, were down 42.4 percent, reported John Butters of FactSet.
There is little doubt the virus has wrought economic havoc. Let’s hope we find a vaccine soon. Future generations may think about COVID-19 the way we now think about polio, measles, and rubella.
Is the United States economy recovering or faltering?
It depends on who you ask and which data you consider. For example, last week, the Department of Labor reported fewer people applied for first-time unemployment benefits during the week of July 11. That could be a tick in the positive data column. Week-to-week the number declined from 1.31 million to 1.30 million. The lackluster decline could be a tick in the negative data column since the long-term weekly average is about 20 percent of that number.
There was positive news about progress on COVID-19 vaccines last week. The hope it inspired was tempered by reports the number of new cases continued to grow in a majority of U.S. states.
Concern about the resurgence of the virus negatively affected consumer sentiment during the first half of July. The University of Michigan Consumer Sentiment Survey reported, “The promising gain recorded in June was reversed, leaving the Sentiment Index in early July insignificantly above the April low (+1.4 points).”
Uncertainty is reflected in the divergent stories told by stock and bond markets.
The year-to-date return for the Standard & Poor’s 500 Index moved briefly into positive territory last week before finishing slightly down, reported Financial Times. That’s an impressive run for a benchmark that was down more than 30 percent in late March. Meanwhile, the tech-heavy Nasdaq Composite has been in positive territory for a while.
Last week, Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley said, “The bottom line, equity markets have been telling us growth is going to surprise on the upside.”
Bond markets have been less optimistic. Yields on U.S. Treasuries remain exceptionally low, suggesting investors continue to seek safe havens amidst uncertainty about the future. On January 2, 2020, 10-year Treasury notes yielded 1.88 percent. Last week, the yield was 0.63 percent.
On a recent earnings call, Jamie Dimon, chairman of JPMorgan Chase, shared his thoughts on the state of the economy. “Can I just amplify it? In a normal recession unemployment goes up, delinquencies go up, charge-offs go up, home prices go down; none of that's true here…Savings are up, incomes are up, home prices are up. So you will see the effect of this recession; you're just not going to see it right away because of all the stimulus…you're going to have a much murkier economic environment going forward than you had in May and June, and you have to be prepared for that…”
Markets may remain volatile until the economic picture gains some clarity.