MARKET RECAP

Stocks advanced around the world with the US up by 2.59% and international stocks by 2.23%. Bonds were flat.

Employers added 1.763 million jobs and the unemployment rate fell to 10.2% in July, showing that the economy continues to improve, however, the rate of job improvement has slowed. In May, 2.7 million jobs were added and in June, there were an additional 4.8 million jobs. Overall, total jobs are down 13 million from February. 30 million people are still receiving jobless benefits.

The IMF projects that the economy in Latin America will fall by 9.4% this year, the worst decline ever, and it will take until 2023 to recover to pre-pandemic levels. That compares to 3% for developing countries and 8% for the US. Millions who climbed out of poverty are threatened. The United Nations said the number of poor people could rise by 45 million to 230 million, and the number of extremely poor can increase by 28 million to 96 million.

Trump is exerting pressure on Tik Tok, a social media platform owned by a Chinese company, to sell itself to Microsoft or be closed down. Chinese state media describe it as a “smash and grab”. On Monday, Trump then insisted that the US government be given a percentage of the sale price! Then on Friday, Trump issued an Executive Orders that seeks to prevent Americans from using the platform, effective in 45-days. You just cannot make this up.

Lord & Taylor filed for bankruptcy. L&T is the oldest US department store at 194 years.

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MARKET RECAP

US equities were up by 1.74% while international stocks fell by 0.78%. Second-quarter GDP fell by a seasonally adjusted 32.9%. It was the biggest drop since World War II when the government started to record the numbers. The number reflects an annualized rate and assumes that the huge decline in output will continue for the year, which will likely not happen. Nevertheless, it shows just how huge a hit the economy took by essentially shutting down for a couple of months. And that was with massive stimulus. Joseph Carson, the former chief economist for AllianceBernstein, estimates that the Federal Reserve and the US government put close to $5 trillion dollars into the economy, roughly matching the nominal GDP of $4.85 trillion. But even with that, GDP fell dramatically. Clearly showing how important a normally functioning economy, with healthy businesses, is to the success of the country. But the 33% decline in the US appears to be better than what happened in Europe, preliminary GDP numbers show Germany with a 35% decline and the other Eurozone majors each declining by more than 40%.

The unemployment numbers are showing that the spike in Covid cases is starting to slow the economy again. The number of initial claims for unemployment increased for the second straight week, up by 12,000 to 1.43 million, and the number of people receiving unemployment increased by 867,000 to $17 million, that increase ended a downward trend that had started in March.

Kodak, which most people probably thought went out of business 10 or more years ago, is still around and popped up on traders’ radar this week. The company filed for bankruptcy in 2012 and has had negative cash flow every year since. The company was selling for $2 per share on Wednesday when it announced that the federal government would loan them $765 million for the manufacture of generic drug ingredients. The Robin Hood investors jumped on it and the stock popped to as high as $60 on Thursday. Another example of the frothiness in this market.

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US stocks fell by 0.31% while international stocks managed a 0.14% gain. The difference, while slight, might, and we emphasize the word “might”, be an early signal that the outperformance by US equities could be coming to an end, at least temporarily. The chart below details how US stocks have obliterated international stocks over the last 10-years, but at some point, there has to be some kind of reversion to the mean, and with high US valuations, the mess in US with politics and Covid, the threat of higher taxes with a possible change in the White House next year, and a declining dollar, the first hints of a change in momentum might be in the air.

Surveys of purchasing managers show that Europe is beginning to bounce back while the US started to lag in July. Europe is now benefiting from their smarter policies in dealing with the virus, which is now under control, allowing their economies to rebound faster.

The US PMI did rise to 50, from 47.9 in June, but economists were expecting a higher number.

European leaders agreed on a $2 trillion stimulus package that would include a mix of grants, loans, infrastructure, and other public investments.

Gold hit a record high, surpassing the previous peak in 2011. On Wednesday, silver hit a seven-year high. Super low-interest rates make precious metals more competitive with currencies, and the flooding of money around the world by central banks is devaluing currencies, which in turn could unleash inflation. Tensions between the US and China are also adding to the interest in gold.

Employment rose in July but at a slower rate than the previous two months. Increases are being seen in healthcare and in transportation and storage. While the overall level of employment continues to rise, initial claims for unemployment did rise last week.

The three leading candidates for a Covid vaccine all reported positive early trial data. AstraZeneca and the University of Oxford, Pfizer and BioNTech, and CanSino Biologics all reported that their shot generated immune responses. There is the chance of a vaccine late this year.

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US stocks advanced by 1.39% in the US and 1.02% outside the US. Bonds were up by 0.33%. Stocks are at a key technical level, pushing up against the recent June 8th high.

As we have written about before, the market is flush with liquidity and that is propping up stocks. Super-low interest rates are also a driving factor. The real rate of interest, which can roughly be measured by the difference between the break-even inflation rate and the 10-year treasury yield, is now negative at about -0.8%. That essentially means that investors are losing money on bonds, pushing them into riskier assets. It also helps explains the weak US dollar (see below) which has fallen since March and the rally in gold and stocks.

Banks are bracing for big loan losses. JP Morgan, Citigroup, and Wells Fargo have reserved $28 billion to prepare for losses down the line. JP Morgan expects the unemployment rate to remain in double digits through next year. Jamie Dimon, the JPM CEO, said that “the recessionary part of this you’re going to see down the road.” Banks expect more problems with paying back loans as government assistance ends. Bank executives did say they saw signs of a recovery as states began to reopen. But the expanding coronavirus is now leading to a pullback in openings. California instituted an immediate halt to indoor activities in restaurants, bars, museums, and movie theatres and also announced that the two largest school districts would start the year on-line. In Hong Kong, Disneyland closed less than one-month after reopening.

In a grim sign for the airline industry, Delta reported a $5.7 billion dollar loss in the second quarter, due mainly to the almost complete absence of passengers in April. But Delta said capacity this quarter would only be 25% of the level of one year ago. Analysts are forecasting combined losses of $23 billion for the industry this year.

The US budget deficit hit $3 trillion for the 12-months ended June 30 due to high stimulus spending and lower tax revenues. As a share of GDP, the 12-month deficit measures 14%. The CBO is projecting a $3.7 trillion deficit for the fiscal year ending September 30th. But that is before what might be another stimulus package now under discussion.

There was a bit of good news out of China. The country reported 3.2% growth for the second quarter. China has benefited from an aggressive campaign to keep the virus under control

Chipolte said it will add 10,000 employees as it opens drive-through lanes for digital orders and Starbucks said it would open about 50 pickup-only stores over the next 18-months. Both examples of how the virus is changing consumer behavior and the restaurant business.

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Stocks were up by 1.82% in the US and 1.73% x-US. The overall US market is almost exactly even with the closing price one month ago on June 10th (up by 0.0018%). The Nasdaq Composite has been keeping the overall US market above water, that index is up by 7.4% during that period, helped by companies like Tesla, which has advanced by 50.7% over the last month. Tesla now has a market cap of $224 billion, worth more than all of the other auto companies combined (excluding Toyota).

The White House and Congress are working on another stimulus bill that they hope to pass by the end of July. The economy might need it, as it seems to be losing momentum due to the expanding coronavirus. Retail and restaurant traffic is falling in key states like Florida, California, and Texas. At the same time, more layoffs could be on the way. United Airlines might layoff up to 36,000 and American Airlines says it has 20,000 more employees than it needs.

But for at least last week, the employment report was favorable. New unemployment applications fell by 99,000 to 1.3 million for the week ending July 4. Applications have been falling since mid-March. However, as means of comparison, the highest number on record prior to this year was 695,000 in 1982. As of June 27, there were 18.1 million receiving unemployment benefits, down by 700,000 from the prior week.

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Stocks were up by 1.09% in the US and 1.99% outside the US. Bonds were up by 0.33%. The market was helped by expectations that the Fed may inject more liquidity into the economy.

For the first half of the year, US equities were down only 3.42%, a remarkable result given the damage to the economy, while international stocks fell by 11%. Bonds were up by 6.27% for the first half as the yield on the 10-year Treasury fell from 1.83% to 0.64%.

As of today, the market is selling at about 25x this year’s expected earnings, 19x next year, and 17x the 2022 estimate. These are high ratios, but on the other hand, interest rates are crazy low. The 2-year yields 0.16%, the 10-year is at 0.68%, and the 30-year is at 1.43%.

Investors have written off 2020 and are focused on the beginnings of a rebound now and further acceleration in 2021 with a return to normalcy in 2022. That might be an optimistic take, but coupled with unprecedented help from the Fed and the government, markets are not far from even for the year.

There was good news on the jobs front. Unemployment fell to 11.1% fro 13.3% as the US added 4.8 million jobs in June. However, the survey was conducted before the recent surge in coronavirus cases. 40% of the job gains were in leisure and hospitality, industries that would be hit harder if the reopening process slows down or is rolled back.

The virus continues to expand, the US has reported record numbers of new cases in recent days. But progress is being made on the vaccine front. Pfizer reported positive early results of its vaccine and says it can be available beginning in the fall and widely available in 2021. Other companies are not far behind.

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Stocks fell for the week by 2.78% in the US and 0.61% outside the US. Bonds rallied by 0.18%, oil fell by 3.36%.

A big reason for the US selloff was the dramatic ramp-up in Covid cases as a record number of infections have been recorded. Infections across the US are up by 65% over the past two weeks.

The stress test results on banks, released by the Fed on Thursday, did not help. Buybacks were suspended and dividends were capped for the third quarter. The Fed also said that future dividends would be dependent upon earnings, couple that with an expanding virus, and financial stocks lost investors’ interest as the week closed. Investors also have to start or have started to price in the chance of a Democratic sweep in November.

Raw material prices have been increasing, a sign that the supply/demand curve is shifting in favor of producers. Raw material prices tend to move in real-time based on supply and demand and increasing prices indicate that the recovery might be ahead of what was anticipated. The raw material prices reflect increased economic activity around the globe, but the surge in the virus might slow down those gains.

The increase in raw material prices might be reflective of the improved purchasing managers index scores as reported by IHS Markit. The US composite measure came in at 46.8, the highest score in four months. A score of less than 50 is contractionary, but the trend is positive. In the eurozone, the composite score was 47.5 in June compared to 31.9 in May.

Gold prices are nearing all-time highs. There are several factors at work. Given ultra low-interest rates, it is more attractive to now hold gold given it does not pay interest. In addition, new fears about the rising virus count might indicate more government spending, which could devalue global currencies.

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Stocks rallied by about 2% in the US and 0.88% outside the US. An improving US economy, from a historically low base, is helping markets. Added stimulus from central banks in the last few weeks is also providing lots of help. And then there is the fear of missing out, with a rally that does not seem to want to stop, investors who missed out are tempted to pile in.

Retail sales were up by 17.7% in May, a record increase. That follows the largest monthly drop ever, 14.7%, in April. However, spending is still lower than the pre-pandemic levels.

The Fed said on Monday that it has $250 billion ready to buy corporate bonds. The central bank said it would begin making those purchases this past Tuesday. The bonds would consist of a broad index that meets certain criteria.

Jobless claims seem to be leveling off. 1.5 million applied for benefits last week, down by 58,000. And the number of Americans receiving benefits fell by 62,000 to 20.5 million in the week ending June 6.

Not all the news is good, markets were spooked on Friday when Apple said they would temporarily close 11 stores in states where the virus is spiking. Case counts are starting to rise quickly in Florida, Texas, Arizona, and California. But these states seem intent on not closing. Meanwhile, in China, a flare-up in Covid cases led to a lock-down in Beijing. Chinese officials canceled flights in and out of the city, closed business, schools, and limited movement in an attempt to stop the next wave of cases.

Many Americans have stopped paying off loans. More than 100 million student loans, auto loans, and other debts have not been paid since the virus started, according to credit reporting firm TransUnion. About 80% of that number is for student loans.

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Stocks fell hard, dropping 4.90% in the US and 3.62% outside the US. On Thursday, stocks fell by 5.90% and the Dow dropped by 7%, on a surge in virus cases and comments by the Fed indicating a long recovery in the job market.

Meanwhile, Hertz (HTZ) advanced by 100% for the week, breaking $6 at one point, even though the company had previously filed for bankruptcy. It would be normal for a bankrupt company to sell at or very close to $0, but this indicative of the new wave of day traders that speculate on anything that might move in price regardless of the fundamentals.

The Fed announced that they would keep interest rates at very low levels for years and were studying ways to help the economy.

The National Bureau of Economic Research made it official, stating that the US entered a recession in February, ending a 128-month expansion. While the announcement was no surprise, when it might end is still up in the air. So far Congress has spent $3.3 trillion to support the economy. The Congressional Budget Office said it would take a good part of the decade to recover and they are looking for a $3.7 trillion dollar deficit this year. The World Bank said that they expect the global economy to shrink by 5.2% this year.

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American’s rioted in the streets in a manner not seen in decades over the death of George Floyd at the hands of police in Minneapolis, but that didn’t stop equity markets, which continued an incredible run, up 5.3% in the US and 7.2% outside the US. The disconnect is startling. Jeremy Grantham of GMO wrote in his latest quarterly letter that the market valuation, as measured in terms of p/e, is in the top 10% in history, while the economy, is in the bottom 10%, and probably worse than that. However, on the other hand, Wharton Professor Jeremy Siegel, has said that if you do a discounted cash flow analysis and assume a 30% drop in earnings this year, followed by a return to normalcy, you would get a price cut of only 4% or so. That is slightly better than the overall US market as measured by the VTI which is down just 5.5% from the February 19 high.

As crazy as it seems that the market would rally with cities burning, it is not without precedent. The week after Martin Luther King’s death in 1968, stocks were up by 2.9% and were up 5.1% one-month after. Stocks were up 1.2% after LA police officers were found not guilty of assault against Rodney King. Liz Ann Sonders, chief investment strategist at Charles Schwab says that “…if you look back at large-scale civil unrest… the market tended to sort of look through that.”

The week was already positive but ramped higher on a surprisingly strong jobs report. The consensus was for a loss of 7.5 million jobs, but employers added 2.5 million jobs. The jobless rate fell to 13.3%, still a terrible number but down from 14.7%. The jobless rate is still 4x higher than in February, and some of the hires might be due to the PPP program. But the market took the report as a signal that the economy can come back to life sooner than feared and that a V-shaped recovery can happen.

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