So Goes Tech...

So goes tech… Stocks dropped yesterday led by technology shares, despite earnings beats. 

A greater-than-expected number of Americans filed for unemployment last week, igniting fears that a virus resurgence may stall a recovery.

N O T E W O R T H Y

The greater good.  Economic theory is an interesting discipline. It is a useful tool when trying to dissect a complicated system like the global economy as well as micro-based systems involving goods like purchasing patterns of Twinkies or gold.  Abstracting models from these complicated systems is not an easy task and are ultimately subject to the model builder’s personal viewpoints.  That is probably where the saying “2 economists, 3 opinions” came from, though I am more partial to the “three-handed economist”, a moniker earned by economists’ ever-present use of the term “…on the other hand”.  All cheekiness aside, we rely heavily on economic theory as a tool to understand causes and affects within the most important part of our every-day existence… money, of course. Economics tends to be good at describing but somewhat lacking in prescribing and many of the theories are based on past observations.  So what would the economists say about this outlier of a year.  Well, perhaps 2020 is not such an outlier after all.  Let’s start with interest rates and the US dollar.

Interest rates are hampered down at painfully low levels.  The cause of the low levels is two-fold.  First, Fed policy has set short term rates at zero, which explains why short term borrowing and lending (CD’s, money market accounts, savings accounts) are so low.  The Fed is also buying lots and lots... and lots of bonds, and the demand caused by the buying is pushing bond prices up, causing yields to go down.  The second factor affecting rates is speculation.  Bond traders and institutional investors buy bonds and push down yields if they expect the economy to be weak in the coming months and quarters. Low rates are good if you want to borrow money but bad if you want to lend it.  Low rates have helped push up sales in the housing market (low mortgage rates) and in contrast has put lots of pressure on banks.  On to the dollar.  People like the US dollar as a safe haven currency… especially when things are going well.   When the US economy was one of the few economies growing, investors rushed in to buy the dollar as an investment or as a currency to purchase US investments.  When the economy contracts or the federal deficit rises, traders sell the US dollar and seek other stronger investments elsewhere.  The dollar, as you might imagine has been going down.  Check out chart 13 (Dollar Index) in my attached daily chartbook if you don’t believe me.  Don’t feel bad for the weak dollar, though.  A weaker currency means that US goods are cheaper to foreign buyers, so a weak currency usually leads to increased demand for domestic goods. Speaking of goods and demand…

This outlier year has given us some interesting examples for future economics textbooks.  I talk about supply and demand all the time in my notes.  Basic theory states that as prices go up demand goes down.  Makes sense, right?  The demand curve is downward sloping.  ON THE OTHER HAND… this theory does not always hold true.  There are two types of special goods in economic theory.  They are referred to as Velben Goods and Giffen Goods.  “Woah Mark, don’t get so deep on a hot and steamy Friday,” you say.  Just bear with me, it will end well.  Gold has been front and center lately.  Investors buy gold as a hedge against everything bad and, as you might suspect,  folks have been buying it this year.  When I say bad I mean when we are expecting inflation and big deficits… which we are in response to massive government spending.  Gold is considered a Velben Good, which means that demand increases along with the price. The higher the price, the greater demand.  We see this in other luxury items such as diamonds and sports cars.  Yesterday, gold closed at an all-time high at $1,887 and demand appears to be increasing. So, it seems that it is earning its Velben classification in the commodity markets.  Now on to Clorox, flour, and yeast.  I won’t go too far here, but you know that those products seem to be following gold lately.  Those goods are referred to as Giffen Goods.  Demand for them also goes up with price.  The reason for their upward sloping demand curves is that there are few, if any substitutes.  These two very obscure economic theories appear to be playing out before our very eyes.  I am not sure which one of the two I would use to classify Twinkies, but those seem to be in high demand these days as well.

THE MARKETS

Stocks sold off yesterday on bad economic data and earnings let-downs.  Selling was not broad-based and was led by the heavily-weighted tech sector.  Earnings from the sector have been beating estimates but missing high-bar expectations for the group.  New claims for unemployment benefits increased more than economists expected which caused friction for equities as well. The S&P500 fell by -1.23%, the Dow Jones Industrial Average lost -1.31%, the Russel 2000 Index closed flat on the day, and the tech-heavy Nasdaq Composite Index dropped by -2.29%.  Bonds climbed and 10-year treasury yields slipped by -2 basis points to 0.57%.

NXT UP

- Markit Manufacturing PMI (July) is expected to come in at 52 compared to last month’s 49.8.

- Markit Services PMI (July) may come in at 51 versus June’s 47.9 reading.  Both numbers above 50 would indicate growth.

- New Home Sales (June) are expected to have grown by +3.6% compared to the prior month’s jump of +16.6%.

- This morning Honeywell, Schlumberger, and American Express beat estimates.  We will hear from NextEra Energy and Verizon before the bell rings this morning.

- Next week will have plenty of more earnings announcements to ponder along with Durable Goods, Consumer Confidence, more housing numbers, an FOMC Meeting, GDP, and University of Michigan Sentiment.  Lots to look at, so please check in on Monday for calendars and details.

daily chartbook 2020-07-24