Monday Morning QB - Market Observations:
- S&P 500 Index Strained to Reach New Highs but Fell Short in the End
- Look for the S&P 500 to Reach a New High Soon
- Number of New Coronavirus Cases Receding in Many States
- Retail Sales Data Shows Americans Are Still Spending Money
- Stimulus Relief Stalls in Congress but Not Officially Dead Yet
Monday Morning QB - Market Performance:
The S&P 500 Index (SPY) flirted with a new all-time high last week but unfortunately ran into resistance at the old record high of 3,386. The S&P 500 index came to roughly 0.2% of its all-time high set back in February.
The Dow Jones Industrial Average added almost 500 points for the week, rising 1.8% to 27,931. The technology-heavy Nasdaq Composite ticked up just 0.1% to 11,019.
By market cap, the large-cap S&P 500, mid-cap S&P 400, and small-cap Russell 2000 all coincidentally finished the week up 0.6%.
Will the S&P 500 Reach a New Record High?
The large-cap S&P 500 Index has experienced a strong start to August, despite not reaching a new high. The S&P 500 has closed positive on 7 of 10 trading days this month.
The S&P 500 made several attempts to eclipse the previous high, which, incidentally, would have erased all the losses suffered during the pandemic. Should the record high be set soon, it will be the fastest ever recovery from a bear market. What might we expect going forward?
According to Marc Chaikin, historically early August strength has been followed by further upside through the month's end. Chaikin’s view is we are experiencing a Fed driven, gradual melt-up in stock prices. So, look for the S&P 500 to finally close above the previous record high before the end of the month.
Chaikin suggests a word of caution, however, a strong August has been subject to bearish September/October price declines. A bumpy stock market leading up to the election is certainly plausible, if not expected.
Stock Market Stalls as Uncertainty Drags On
The stock market, in general, continues to monitor three fronts – Coronavirus outbreaks, economic data and fiscal stimulus haggling.
Coronavirus Outbreaks - Everything seems to move according to the virus and the news around potential vaccines. New confirmed coronavirus cases fell last week in much of the country. On Thursday of last week, Johns Hopkins reported the lowest 7-day moving average of new cases since July 7th. The number of new cases was lower than the 14-day moving average as well.
However, before we start preparing for the all-clear sign, the moving averages are still higher than at any point in April or May. We will all be watching to see how the back to school start affects the averages from now on.
Economic Data – Week in and week out, the economic data mostly supports the theme that the economy is recovering.
Unemployment - The number of Americans filing for first-time unemployment benefits fell by 228,000 last week to 963,000. Economists had expected 1.1 million new claims. This was the lowest level since March when the economic shutdown from the coronavirus took hold.
The decline in initial claims suggests a gradual improvement in labor market conditions. Declining claims may also be a sign that the economic recovery is getting back on track.
Continuing claims, which counts the number of Americans already receiving benefits, fell by 604,000 to 15.486 million. These millions of unemployed Americans are looking to Congress to get their act together regarding more stimulus.
Retail Sales - Sales continue to reflect an American consumer willing to spend.
The Commerce Department on Friday reported that retail sales grew 1.2% in July. The Wall Street Journal reported that after adjusting for seasonal factors, sales are 1.7% higher compared to February’s number (pre-COVID).
More people getting back to work, along with the enhanced unemployment benefit, has helped fuel better than expected earnings from U.S. companies. With earnings season nearing its close, the big question is, “Will consumers keep on spending without an extension to their unemployment benefits?”
Stimulus Haggling – There are doubts that the economic recovery can continue without more stimulus coming out of Washington.
The negotiations have reached a standstill in the next round of coronavirus stimulus talks. Both sides have set triggers for restarting talks, which neither party is willing to meet.
As discussed in last week's Monday Morning QB (MMQB), the stimulus bill bogged down over all the extras added to the law rather than concentrating on getting unemployed Americans some additional money. The fight last week was over cash to the post office.
The distractions continue as millions of unemployed Americans try to figure out how to pay their bills. The Trump executive order for $300/week of additional unemployment benefits will likely not reach workers for weeks.
Shame on Congress (both sides)!
You need to pass a stimulus bill including an extension of some amount of enhanced unemployment benefits and work out the rest of the non-virus-related issues in another bill. Save your pork projects until after the election, please.
Whose "Science" are We Counting On?
Our current problem is the coronavirus data creates conflicting opinions on what to expect from here.
Covid-19 data collection and reporting methods, plus methods of interpretation of that data, vary widely. That is why the experts seem to contradict themselves so much.
I do not believe the people who “really” care about coronavirus science are politically motivated. Like the stock market, no one knows exactly where the science will be tomorrow. Predictions from the "science" we know about the "science" we do not know are sure to be wrong.
For now, the stock market trajectory and virus science are linked. The market rise has not been without a little hope mixed in with better than expected economic data.
I will be on vacation next Monday and returning from dropping my oldest son off at college to start his freshman year the following Monday. Therefore, the MMQB will take a short two-week break. I wish you all the best as we move on from another summer.