All that glitters... is Gold, which rose to a new all-time high, topping $2000 an ounce. Stocks also rose yesterday on solid earnings beat and hope that a new stimulus bill may be around the corner.
N O T E W O R T H Y
A tale of two (very different) views. Yesterday, I wrote about how investors have become somewhat enamored with SPACs. Also in yesterday’s note was a brief on how demand for high-risk, higher-yielding bonds have driven spreads to impressive lows. By “impressive” I mean expensive, adding further to the riskiness of the investment. Almost equally impressive to SPACs and junk bonds is the performance of the stock market. The S&P500 is now up by +2.38% for the year and the Nasdaq composite index is up by +21.94% at an all-time high. In sharp contrast to this obvious desire for risk assets is the dire economic backdrop. I want to qualify that with a word or two. The economy is in a recession and unemployment has grown at a record pace. Some measures of the economy are showing some signs that the worst may be behind us, but it is very clear that there is still much hardship on the horizon for many businesses that will most likely close for good in the coming months. Aggressive action from the Fed and a bazooka stimulus bill from the Government have managed to stop the bleeding and with the former running out, a follow-on bill will continue to support a slow recovery. Insiders are hopeful that a bill will be sent to the President by the end of the week, despite the intense wrangling between the parties and the Whitehouse. Much has been written (including in my note) about the disconnect between the stock market’s performance and state of the global economy. Investors have been able to justify it by factoring the economic growth beyond the pandemic. Speculation in SPACs is, well… speculation, which exists during all market regimes. Driving down spreads on risky junk bonds reflects desperation for yield with hopes that government bailouts will limit defaults. Two other assets classes which are worth noting are treasury notes and recent-sensation gold. Let’s start with gold. Need I say more? I will add that there are many factors that lead to gold’s rise. Yes people buy it when they are worried about the economy. A weak dollar means that owners of foreign currencies can convert to dollars and buy the commodity, which is traded in the greenback. The recent drop in the dollar has certainly contributed to the commodity’s rise in price. Investors also purchase gold when real yields are small or negative. Real yields are interest rates that factor in inflation. In times of high inflation, a fixed coupon from a bond or a time deposit loses value because a dollar can buy less goods in the future. In the current environment, it is not inflation that is the worry but the rapid decay of interest rates. Bonds are simply paying less and less. Google just sold $10 billion five year notes with a coupon of 0.45%. The most accurate measure of inflation (PCE) pegs it at +0.8%. That is also low, but leaves investors with a deficit of -0.35%. Speaking of those low yields… Remember, bond investors buy bonds when they think that there is trouble for the economy on the horizon. That is why bonds typically trade in the opposite direction of stocks. Lately, that has clearly not been the case. On March 9th, when the clouds were thick overhead and the S&P500 was down some -15% for the year, 10-year treasury yields hit an all-time low of 0.5407%, which makes sense considering the environment at the time. Just yesterday, 10-year treasury made a new all-time low of 0.5069%. This, on the same day when the Nasdaq hit an all-time high. In the bullish column are stocks, junk bonds, and SPACs while the bears include gold, and treasuries. It’s not at all clear which ones are correct in their projections, but what is clear is that the market always makes the final judgement… on portfolios that is.
THE MARKETS
Stocks rose yesterday on hopes that lawmakers will come to agree on the CARES 2.0. The S&P500 climbed by +0.36%, the Dow Jones Industrial Average rose by +0.62%, the Russell 2000 advanced by +0.69%, and the Nasdaq Composite Index jumped by +0.35% to its 29th all-time high of the year. Bonds rose and 10-year treasury slipped by -5 basis points to 0.50%.
NXT UP
- This morning ADP released its Employment Change (July) number which vastly missed expectations of +1.2 million with only +167k, however last month’s number was revised upward from 2.369 million to +4.314 million. Markets, like you, are still trying to figure out if that is good or bad.
- Markit Services PMI (July) is expected to come in at 49.6 in line with prior estimates, while ISM Services Index (July) is expected to come in at 55.0 down from last month’s 57.1.
- Cleveland Fed President Loretta Mester will speak today.
- This morning CVS, BergWarner, Regeneron, Sempra Energy, Discovery, New York Times, Humana, Starwood Properties, Horizon Therapeutics, Wayfair, and Moderna beat estimates. After the close, we will hear from Zinga, SunPower, MetLife, Carvana, Albemarle, Etsy, Roku, Welltower, Marathon Oil, Western Digital, Fitbit, Vivant Solar, Energy Transfer LP, ADT, Sonos, Square, and Live Nation Entertainment.