Week Ending 7/24/2020


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.


Week Ending 7/17/2020


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.


Week Ending 7/10/2020


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.



Week Ending 7/2/2020


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.