Almost Is Not Good Enough

Almost is not good enough. Stocks slipped yesterday, missing an opportunity to rise above break-even as lawmakers take a long weekend break to contemplate their lack of progress on a stimulus package. Unemployment showed some signs of a turn-around but it was not enough to rouse the market bulls.

N O T E W O R T H Y

Baby steps…steps…steps. 

Yesterday’s market action could have been a contender.  The headlines would have been perfect: “Stocks roar back in 100 days, making new highs!!!”  But it didn’t quite work out that way.  As we know, stocks don’t always do what is convenient for most of us. The S&P500 did briefly, once again, breech that important high-water mark in intraday trade, but gains faded late in the session leaving the bulls empty handed. We are pretty much in the final days of second quarter earnings season and the results, depending on how you look at them, were moderately good.  If beating Wall Street estimates is a mark of success, then we can safely say that companies have done well in the last quarter.  If we are looking for earnings growth… well, we would be a bit disappointed.  Rightly so, analysts had set the earnings bar low for companies as they attempted to factor in the fall in revenues that resulted from the height of lockdown.  To be clear, not all companies saw diminishing revenues.  Some experienced abnormal growth.  Think Clorox, Amazon, and Netflix.  In those cases analysts set high-ish bars, which in that case of those three stocks were handily leapt over. The fact that there were so many unknowns and lack of guidance led many conservative analysts to relax their expectations.  But for a decline in revenue growth, you might not even know that the country was in the thick of a pandemic and recession if you simply followed earnings results. With respect the economy, the process is a bit different. Corporate analysts have an entire quarter to analyze, project and revise their expectations, often based on information they collect from companies and their customers.  There is no such thing as guidance when it comes to forecasting economic growth. Economist’s models must be based on actual tallies which are often collected and compiled from multiple, often disparate, sources. Once these numbers are released, economists use them as inputs to elaborate models which are used to forecast the future.  For a simple example, if an economist wants to forecast economic growth in the 4th quarter, she might use changes in employment (more employed workers means more consuming), consumer prices (lower prices mean more consuming), interest rates (lower rates mean more consuming), and consumer confidence (confident consumers consume more).  The economist will then take these inputs and see the historic mathematical relationship they had with economic growth.  Assuming that the relationship exists and stays consistent, the economist needs only to enter those numbers as they become available from the various government agencies.  Of course, it is far more complicated than this example, but generally speaking, that is how economists forecast.  However, we may not need to know the exact GDP to ponder our economic future. Remember that GDP is made up of consumer spending, corporate investment, and government spending.  We know that the Government is going to continue to spend money at an increasing pace… because its budget is technically unlimited. Corporations, in theory, will spend more on capital investment when interest rates are low… and they are low.  Companies have been taking advantage of low rates and the booming bond market by borrowing at a record pace.  In this case though, they are likely using proceeds to keep their companies afloat.  We can therefore count on companies to decrease spending until the broader economy turns around. Now the important, and oft covered by me, fact: corporate and government spending only amounts to around 30% of GDP, with the bulk coming from consumers… you and me.  Now back to our simple economic model.  Interest rates are low: positive.  Consumer confidence is lower than it has been but is improving (it hit a low of 85 in April and has risen to 92.6): mildly positive.  Consumer prices have been subdued for sometime leading up to the pandemic, growing slightly below +2% annually.  Once the pandemic struck, inflation slowed to a halt, except for certain consumables which rose as result of supply disruptions.  But for the most part, inflation is not yet a factor, though it did tick up slightly quicker than expected in July: slightly positive. “Slightly” because prices are not going up fast and the small increase last month was the result of increased demand.  Finally, and most importantly, unemployment: Even if people are employed they tend to tighten the purse strings when unemployment is higher for fear that their jobs might be lost if the situation worsens. Unemployed workers obviously consume less, which is a drag on consumption.  The US unemployment rate jumped from 3.5% in February to 14.7% in April, only to pull back slightly to 10.2% last month.  Clearly that is major potential drag on economic growth.  But there are some signs that the employment situation is getting less bad.  A more granular read on employment is the weekly Jobless Claim figures issued by the Department of Labor. Yesterday, the release showed that 963k Americans filed for first time unemployment benefits, lower than economists’ estimates. While the number is quite high, last week marks the first week since March that the number of new applications was below 1 million.  For reference, that number averaged around 200k prior to the pandemic.  More importantly, Continuing Claims for the prior week are trending down as well, indicating that folks are returning to work… slowly.  So, the jobs situation gets rated: hopeful.  So after all of this analysis, we can’t come up with an actual GDP growth rate for next quarter but we can surely see that things have the potential to improve.  In the current situation… positive movement, even baby steps, are worth noting.  Stay positive!

THE MARKETS

Stocks dipped slightly yesterday as talks between lawmakers continue to languish.

Employment numbers were encouraging but could not supply enough fuel to push the S&P to new highs.  The S&P500 slipped by -0.20%, the Dow Jones Industrial Average lost -0.29%, the Russell 2000 Index gave up -0.22%, and the Nasdaq Composite Index added +0.27%. Bonds slipped and 10-year treasury yields rose by +5 basis points to 0.72%.

NXT UP

- Retail Sales (July) is expected to have grown by +2.1% compared to a +7.5% jump in the prior month.

- Industrial Production (July) may have risen by +2.0% compared to June’s +5.4% growth.

- University Of Michigan Sentiment (August) may have slipped to 72.0 from 72.5.

- Dallas Fed President Robert Kaplan will speak today.

- Next week we will get some more corporate earnings along with regional Fed reports, housing numbers, the Leading Index, and manufacturing/services PMI’s. Check back on Monday for calendars and details.