Mixed emotions. Stocks posted a mixed close yesterday as US-China relations seemed on track to improve. Consumers are losing confidence which concerned investors, but not all of them.
N O T E W O R T H Y
Weakening spine. I like economic indicators. There, I said it. But I need to clarify what I like them for. They are a great source of quantitative information regarding the health of the economy… just a while ago. WHAT? Yep, I have said it before but I feel that we must be clear on this. Most economic indicators tell us how things were in the prior month or quarter. A few of them take a shot at giving us a monthly snapshot right at the end of the current month, but those usually only include activity from the first two weeks of the month. So, imagine asking me how I feel and I say “I felt great last month!” That answer alone, would probably warrant a trip to the Dr. But if you realized that I was unable to tell you how I feel in this exact moment, you might ask the question differently. Something like “how did you feel last month, the month before, and the month before that.” With that answer you might be able to spot a trend and guess how I might feel today and even possibly tomorrow. So, we can look at the trends of economic numbers with the hopes of identifying a pattern and perhaps, take a gander on where things might be in the future. That is reasonable at a high level but not very accurate, especially during times of change… like the current. So how do we know how healthy the economy will be next month, next quarter, and beyond? Well, we can look at GDP figures and see that the economy contracted in the first quarter of the year (down -5.0%) and based on the preliminary numbers we can see that economists expect that annualized GDP fell by -32.5% in the second quarter. Ok, that is bad but not shocking as the number covers the quarter that ended on June 30th... almost two months ago. It also included the period where most of the country was in one form of lockdown or other. Things have surely improved somewhat since, which leaves us wondering whether we can observe the trend of GDP going from bad to worse and assume that the trend will continue into the current quarter, almost 2/3 done! Well let’s look at what drives GDP. Government and Business spending make up about 30% of GDP and the rest lies on the consumer. The consumer, as in you and me. So what affects how we spend money? Well, the primary driver is income, and the primary driver of that is employment. We know that the employment situation has improved somewhat, but it is still bad. The trend of the weekly data suggests that roughly 1mm workers continue to lose their jobs every week. Now, that is down from the peak of 6.9 million weekly job losses in late March, but it is still quite high by historic standards. We can look at other numbers such as Retail Sales which is tracked by the Census Bureau. That number shows a nearly -15% drop in April followed by an +18% spike in May, followed by growths of +8.4 and +1.2% through July. That all makes sense based on what we experienced through that period. The data suggests a surge in consumer activity as locked down businesses began to reopen and CARES act stimulus was at its height. The moderation that followed was likely affected by the resurgence of virus cases. So, unemployment remains high and growth in retail spending has moderated. Where do we go from here? Why not just ask consumers what they think. LIGHTBULB!!! Yesterday, the Conference Board released its Consumer Confidence number for August and it missed economist estimates, falling from a revised 91.7 in July to 84.8 in the current month, its lowest level in 6 years. Digging further, the index saw confidence drops in both the current situation as well as in future expectations. My regular readers know that I am obsessed with consumer confidence. Confident consumers spend money which drives the economy. This recent pullback in confidence certainly reflects the uncertainty of not only the current situation, but also the months ahead. The good news, if you could call it that, is that consumers change their minds quite quickly, so they can regain confidence quickly if things improve on the virus front. As consumers regain their confidence they can get back to doing what it is that they do best: consume.
THE MARKETS
Stocks had a mixed close yesterday. Early gains on positive news on US-China trade discussions were overshadowed by a weak Consumer Confidence release that fell to its lowest level in 6 years. The S&P500 rose by +0.36%, the Dow Jones Industrial Average fell by -0.21%, the Russell 2000 Index advanced by +0.17%, and the Nasdaq Composite Index climbed by +0.76%. Bonds fell and 10-year treasury yields climbed by +3 basis points to 0.68%.
NXT UP
- Durable Goods Orders (July) are expected to have increased by +4.8% compared to last month’s +7.6% growth.
- Richmond Fed President Thomas Barkin will speak today.
- This morning, Dicks Sporting Goods beat expectations and we will hear from Williams-Sonoma, Splunk, and NetApp after the close.