The month of July ended with the S&P 500 closing above where we ended 2019, finally. While the NASDAQ is positive for the year, the Dow Jones Industrial Average ended July still negative for the year (-7.8% YTD). For the most part, the S&P 500 Index has been moving up and down within a trading range this past month. We will have to see if the close above the year-end value continues upward in a positive trend.
Since the March lows, when the S&P 500 had retraced more than 35%, the major indices movement upward has been largely driven by the FAAMG stocks (Facebook, Apple, Amazon, Microsoft and Google). The FAAMG stocks account for more than 20% of the market capitalization of the S&P 500. As of the end of the month, roughly 65% of all the stocks traded in the US were trading below their 200-day moving average. So for now, we believe that this is not a broad-based market rally. Going into August, we are entering into what historically is a volatile time in the markets. Here is what we are thinking about this month:
Second-Quarter GDP Drops 32.9%… The number is annualized, so in the 2nd quarter, GDP fell 8.2%.
What it means— The best that can be said is that GDP fell less than expected last month. It’s still a lousy number, even if investors are acting like it doesn’t matter. Personal consumption fell almost 35%, and fixed private investment dropped 49%. On the plus side, discretionary income jumped more than 40% and the savings rate shot up to 25%. Americans have a lot of cash, but with the $600 federal unemployment bonus checks ending today, that might change quickly.
More Americans Are Filing Jobless Claims… The number of Americans filing for initial jobless claims increased from 1.42 million to 1.43 million.
What it means— It wasn’t a big move, just 100,000 in a workforce of 158 million, but it’s still the wrong direction. An additional 900,000 people filed continuing claims in state-run programs, but fewer people filed continuing claims for federal Pandemic Unemployment Assistance. Overall, continuing claims dropped from 31.8 million to 30.2 million.
With coronavirus cases rising again in several states, some governors and local officials are reinstituting business restrictions, which won’t put more people back to work. Review site Yelp! reports that 71,500 businesses listed on the site on March 1 have closed for good.
Republicans and Democrats Fail To Extend Benefits… The Senate proposed a $1 trillion relief package that was summarily dismissed by Democrats, leaving the $600 federal unemployment bonus checks and federal moratorium on evictions to expire.
What it means— President Trump wanted to pass an extension bill that kept the bonus checks flowing and the eviction moratorium in place while the two sides negotiated the rest, but House Speaker Nancy Pelosi and Senate Minority leader Chuck Schumer weren’t having it. The standoff between the feuding political parties leaves millions of unemployed workers wondering how they will pay their bills and gives thousands of landlords the green light to start evicting tenants who are behind on their rent. If the Senate and House don’t work out a deal soon, August could be a financially disastrous month.
June Durable Goods Orders Rose 7.3%… After falling between 15% and 20% in March and April, durable goods orders rose 15% in May and 7.3% in June.
What it means— It’s great to see the jump, but how long can it last? With much higher COVID-19 infection numbers in July, states clamping down on business, and now federal unemployment benefits expiring, it looks like the resurgent economic activity will roll over. New vehicle orders jumped 86% last month, but vehicle and parts orders remain 25% lower in the first half of 2020 than they were in the same period last year.
May S&P CoreLogic Case-Shiller Home Price Index Up 4.5%… The index showed the annual rate of price increase dipped a bit from April, when prices were up 4.6%.
What it means— Home prices remain solid, as people make their getaways to the suburbs and have little inventory from which to choose. The big question is, what happens to the places they left? Rents are falling a bit in cities like San Francisco. It will be interesting to see if that trend accelerates in the months ahead and spreads to other large cities across the nation.
Federal Reserve Leaves Rates and Spending Unchanged…The central bank left short-term rates at 0.0% to 0.25% and kept its spending target at $120 billion per month.
What it means— The Fed is trying to use one of its other tools to sway the markets, the bully pulpit. Fed Chair Powell told the world that the coronavirus is threatening the U.S. economic recovery, and the Fed stands ready to take action if necessary. The fixed-income world has been debating the possibility that the Fed would target interest rates beyond the overnight rate, like pegging the 10-year Treasury at 0.5%, for example. By announcing a peg, like the Japanese and Australians have done, the Fed can stop buying and rely on market participants to keep yields in check. The problem is that the move would ruin any price signaling that existed in the bond market, giving borrowers like the government undeserved cheap money while stealing value from investors.
On a lighter note…Russian Authorities Want New Feature in Cars… Breathalyzers… The Russian government is trying to persuade auto manufacturers to make breathalyzers a standard feature on new cars. The devices won’t allow a vehicle to start until the driver blows into a tube and registers a blood-alcohol level below the legal limit. Even though alcohol consumption has fallen more than 40% since 2003, the country still suffers with high numbers of DUIs and alcohol-related deaths. For their part, the car manufacturers aren’t keen on adding another standard feature during a pandemic that’s slashing sales. However, given that the legal blood alcohol limit in Russia is a mere 3x greater than legal limits in the US, maybe this isn’t such a bad thing for Russians.
Enjoy the remainder of your summer!