Hello once again, Happy Monday to everyone. We have a big month ahead of us in July as you will read below.
Performance DJIA:
Mon 7/6 +1.78%
Tues 7/7 -1.51%
Wed 7/8 +0.68%
Thurs 7/9 -1.39%
Fri 7/10 +1.44%
Last week +0.96%
Since 2/19 market high -11.15%
Bond model you are in:
Last week +0.08%
Comparison:
Bond model last 30 days +0.54%
Tid Bits:
1. July is setting up to be a month of “information”. Some bad information, and hopefully some good as well.
a. Potential bad information:
i. Beginning of election season (negative commercials aimed at the opponent)
ii. CARES stimulus package of Federal unemployment runs out which is $600/week on top of the state unemployment that last longer.
iii. 2nd quarter numbers announced for GDP, with official announcement we are in a Recession.
iv. Coronavirus cases going up quickly. The number of deaths lags the reporting of new cases. Meaning, more deaths are likely to go up.
b. Potential good information:
i. President Trump already announced there will be a 3rd round of Stimulus. We don’t know yet, how much, when it will come out, and who will benefit from it. Congress is in summer recess right now until July 20th, which is expected they will meet and finalize this and make an announcement before the end of July. Democrats want $3Trillion and $600/week for keeping the Federal unemployment going. The Republicans want $1Trillion with $300/week for keeping the Federal unemployment going. When finalized, we will be sure to include the details in that week’s Monday mass email. The Republicans and President Trump want to do all they can to make sure he get re-elected and additional stimulus will help financial and economic numbers, helping his cause on re-election. However does sweep the problems down the road to be handled later.
a. Information neutral
i. June unemployment numbers released:
The unemployment rate declined by 2.2 percentage points to 11.1 percent in June, and the number of unemployed persons fell by 3.2 million to 17.8 million. Although unemployment fell in May and June, the jobless rate and the number of unemployed are up by 7.6 percentage points and 12.0 million, respectively, since February.
2. Will fatalities spike again as COVID-19 cases rise, and what could that mean for markets? CONTRIBUTOR MEERA PANDIT (JP Morgan Analyst)
i. *After crushing the curve in the U.S., cases of COVID-19 have begun to rise rapidly again, with the resurgence occurring in new hotspots. According to Johns Hopkins, the average daily increase in cases is nearly 50,000, compared to just under 30,000 at the mid-April peak.
ii. *The increase in cases coincided with the reopening of the economy, as 42 states and territories emerged from state or regional lockdowns. After all 50 states either fully or partially reopened, 21 states have now either paused reopening plans or reversed them.
iii. *Although cases are increasing rapidly, fatalities have fallen. This does not mean they will not rise ahead; fatalities are a function of the number of cases but operate on a lag.
iv. *Statistical analysis on data since mid-March suggests that deaths from the virus occur approximately 13 days after cases are reported. Using lagged case data and the share of positive tests over the last four months, we estimate that fatalities could sadly rise in the weeks ahead before stabilizing.
v. *However, while any loss of human life is substantial, fatalities this time around are unlikely to surpass the mid-April peak of about 2,200 per day. Part of this is better treatment, as medical care has improved as we have learned more about the virus. Most of it, however, is likely because the demographics of new cases has shifted.
vi. *According to the CDC’s weekly publication, COVID View, and as highlighted in the chart below, the share of COVID-19 cases of patients 65 years and older has declined meaningfully since April, which has material implications on the number of fatalities. The mortality rate through May was roughly 1% for those under 60 years old, but it was about 15.6% for those 60 and over, according to CDC data.
3. According to estimates compiled by FactSet, analysts predict that earnings for the S&P 500 plummeted nearly 45%, which would be the biggest drop since a 69% plunge during the depths of the Great Recession in the fourth quarter of 2008. Revenues are expected to have fallen more than 10%. Retailers, energy companies and industrial firms likely reported the biggest declines in sales and profit.
Facts:
Coronavirus
Global 13,069,965 cases 572,315 deaths
US 3,414,557 cases 137,795 deaths (+3.9%, +5,185 increase from last week)
KS 19,161 cases 296 deaths
MO 29,079 cases 1,117 deaths
Highlights from analysts and economists (due to July being a big month of information, we’ve added in a couple other resources for quotes)
1. From Christopher Bogbin of Alliance Bernstein
a. Risks abound. Market performance late in the quarter indicated that rising COVID-19 case numbers can quickly trigger a correction. Even though macroeconomic data is improving, the global economy is undergoing its biggest recession in modern history. Nasty surprises in company results and stock returns can be expected.
b. So why did stocks do so well in this environment? We think the rebound reflected the fact that investors’ worst fears had been averted. While the road to recovery will be bumpy, a total global meltdown or prolonged depression now looks unlikely, given the fiscal and monetary stimulus commitments by governments and central banks.
c. Concentration Risks Are Growing : The wide dispersion of returns in different parts of the market is creating new distortions. The extreme case is the Russell 1000 Growth Index, where five stocks now account for a record 36.9% of the entire benchmark. In broad global benchmarks these same names have a larger combined weight than any entire country’s market, other than the US. Partly as a result, US stocks now account for 66% of the MSCI World, versus just 30% three decades ago.
2. From Robert Schiller of Project Syndicate (Noble Peace Prize winning economist)
The worse economic fundamentals and forecasts become, the more mysterious stock-market outcomes in the US appear. At a time when genuine news suggests that equity prices should be tanking, not hitting record highs, explanations based on crowd psychology, the virility of ideas, and the dynamics of narrative epidemics can shed some light. After all, stock-market movements are driven largely by investors’ assessments of other investors’ evolving reaction to the news, rather than the news itself. That is because most people have no way to evaluate the significance of economic or scientific news. Especially when mistrust of news media is high, they tend to rely on how people they know respond to news.
3. From Jeffrey Gundlach, CEO DoubleLine Capital
a. The Federal Reserve’s campaign to bolster the bond market is only postponing an inevitable collapse of many fixed-income issues, says Jeffrey Gundlach, aka the Bond King.
b. In addition to Treasury debt and mortgage-backed securities, the Fed is buying corporate bonds, and even some that are junk-rated. The central bank has a program to purchase up to $250 billion, and it can go even higher if it chooses. The mere promise of possible Fed intervention in the bond market has had a big impact. The problem is that the Fed is “delaying the inevitable. In the meantime, they have a lot of wherewithal to continue delaying because they are spraying money all over the place and buying all these assets,” Gundlach said in an interview with Yahoo Finance. Gundlach, the CEO of DoubleLine Capital, argued that “the price of corporate bonds isn’t really real. There’s no price discovery mechanism that’s being pegged. There’s no message; there’s just a target price that the Fed has been doing, and that led to a pop-up in corporate bonds.” The big fear about corporate bonds rated BBB, the last investment-grade rung before junk, is that a lot of downgrades to high-yield are in the offing. Right now, BBBs comprise half of all investment grades. “So if they get downgraded,” he warned, “we know the pricing is going to suffer very significantly.” And that would harm bond investors.
4. From JP Morgan
a. Weekly Market Recap
i. The 2Q20 earnings season kicks off this week and the outlook is particularly bleak. With a handful of early reports in the door (4.2% of market cap), we currently expect 2Q20 S&P 500 earnings per share (EPS) to come in at $21.86, a -45.5% contraction from a year ago. Specifically, the energy and consumer discretionary sectors are expected to see earnings turn negative, which will weigh on the performance of the index in aggregate. Additionally, financials are expected to see earnings fall -58.4% year-over-year, but there is additional downside risk to this number given the rising risk of further increases in loan loss provisions.
ii. Although no sector is expected to see positive earnings growth this quarter, utilities, health care and technology should hold up well on a relative basis, and are expected to see EPS grow -0.2%, 0.0% and -7.7% year-over-year, respectively.
b. Notes on Week Ahead
i. Following a shocking collapse between February and April, economic data have, so far, staged a very swift recovery, with Thursday’s June Jobs report showing a record 4.8 million monthly gain in non-farm payrolls following a 2.7 million rise in May. However, this still represents just 34% of the 22.1 million jobs lost in the prior two months. Moreover, the real limits to economic activity in a pandemic, combined with a rising number of new infections and timing effects of provisions in CARE’s Act all threaten to divert the recovery to the back roads, leading to slower progress from here.
ii. Recent high-frequency economic data continued to show gradual increases in the numbers flying, staying in hotels and eating out at restaurants. Monthly auto sales rose in June relative to May as did construction employment. However, all of these activities remain well below pre-pandemic levels and a recent surge in new cases could slow further gains from here. While social distancing reduced confirmed cases from over 30,000 per day in mid-April to just 20,000 by late May, this number has since vaulted higher and is now running at close 50,000.
iii. In terms of timing, Congress returns from its July break on July 20th but then goes into recess between August 10th and September 7th, so if a bill is passed it would most likely be in early August. However, negotiations on this bill will likely be tougher than previous packages, partly because of the proximity of the November elections and partly due to genuine ideological differences between the parties. In particular, Democrats want a further extension to enhanced unemployment benefits and more aid to state and local governments while Republicans are intent on providing incentives for rehiring workers and protecting businesses from Covid-related lawsuits. Both sides also appear to be in favor of further “one-time” checks to families. If a bill is passed that contain all of these elements, but which somewhat reduces the generosity of unemployment benefits, then increasing economic activity can probably proceed, even as the pandemic, by some measures, worsens. However, even in this case, bankruptcies and layoffs will likely continue as more and more businesses find it difficult to stay afloat with the much lower revenues and higher costs of a pandemic economy.
iv. Moreover, if Congress fails to pass further stimulus, then the economic rebound could slow more sharply in the months ahead, with the unemployment rate potentially rising back into the teens. While such a relapse is possible, it probably wouldn’t be enough to turn real GDP growth negative in the next few quarters. Moreover, entering 2021, medical solutions, rather than medical problems, should take top billing in driving economic activity.
Opportunities:
1. Community Café is Wednesday, July 15th at 8:00am for 30 minutes. Topic will be on 2nd Marriages & Blended Families
- Will live stream on Facebook Live anyone who is friends with me on Facebook.
- Email invitations were sent to join on the Zoom.com platform
- Glenn Stockton of Stockton & Stern and myself will be speaking
- Invitations will go out via email with a link to join on zoom.com, plus those who are friends with me on Facebook
2. If you would like a copy of my 30 minute recording of Community Café on the topic of “Tax saving Strategies”, please contact Stacy and we can email it to you.
3. Are you over age 72? RMDs, can be re-invested back into your IRAs.
If you previously took your annual RMD, and with the stimulus package CARES allowing RMDs in 2020 only to be skipped, you can put that money back into your IRA. Call us for more details.
Reminders:
1. Don’t forget that the news creates drama. The stock market moves for 2 reasons which are greed and fear.
2. Any service work you would like us to do for you, please email your request to us.
Please feel free to share this email with anyone you know, as the best way to battle stock market anxiety is education.
Thank you for your time in reading these updates.
Stay safe and stay healthy,
Mark Roberts
