Monday Morning QB - Market Observations:
- President Trump Decides to Go It Alone as Coronavirus Stimulus Negotiations Fail to Produce an Agreement…Look for a Deal to Get Done
- Jobs Report Showed Employers Added 1.8 Million Jobs in July
- Unemployment Rate Dropped to 10.2%
- Tensions Between China and U.S. Escalate in Front of August 15th Meeting to Assess Trade Negotiations
- Coronavirus Deaths Top 160,000 in the U.S.
Monday Morning QB - Market Performance:
U.S. stocks recorded solid gains for the week, pushing the technology-heavy NASDAQ Composite index to new highs and lifting the S&P 500 to within roughly 1.2% of its February record peak.
The Dow Jones Industrial Average added over 1,000 points ending the week at 27,433, a gain of 3.8%. The NASDAQ Composite rose an additional 2.5% following last week’s strong gain.
By market cap, the large cap S&P 500 added 2.5%, while the mid cap S&P 400 jumped 4% and the small cap Russell 2000 surged 6%.
Stimulus Deal Missed White House Deadline
Writing last week’s Monday Morning QB (MMQB), I was hopeful that our divided political system would strike a deal providing aid to millions of unemployed Americans while at the same time giving another boost to our clients' portfolios.
The market reacted daily to the news coming from the negotiations between key Democrats and the members of the White House team. The S&P 500 closed higher every day last week in anticipation of a deal.
Last week began with Treasury Secretary Steven Mnuchin saying that both sides were going to try to get an overall agreement by the end of the week so that the legislation could be passed this week. President Trump chimed in with his warning, saying that if a deal could not be reached by the end of the week, then he would act through executive orders.
Before briefly touching on some of the political wranglings, let us not forget what is really at stake.
The Federal government paid $16.4 billion in enhanced unemployment benefits for the week ending July 25, according to the Labor Department. According to the Wall Street Journal, this equates to around 27 million Americans receiving the $600 per week additional unemployment benefit. That’s real money needed to temper lots of hardships for real people.
Let's also not forget what has already been done.
Bipartisan compromise has already authorized roughly $3 Trillion in spending to deal with the coronavirus since March. Essential help for Americans came in the form of stimulus checks, extra unemployment benefits for those who lost their jobs, emergency loans and grants for businesses, as well as money to help states and local governments.
All this is in addition to the Federal Reserve opting for the most accommodative monetary policy in history.
So, why all the politicking now?
The $1 Trillion Gap
To make sure I was getting it, I did something I never do - listened to the Sunday political talk shows.
After clearing out the expected finger-pointing, a clear message developed. The two sides are around $1 Trillion apart.
Digging into the proposals, or at least what has been reported, the gap is easy to fix – cut out non-coronavirus items from the coronavirus relief package. Sounds sensible right, so what gets cut and who does it affect most?
The most significant item is a temporary ban on the $10,000 cap for state and local income tax deductions, a part of a tax bill signed into law in 2017. The bill raised the standard deduction to help offset the lost deduction for state and local taxes paid.
If you did not itemize your taxes, this did not affect you. Middle to low-income families typically do not itemize their taxes.
The cost of tax relief is estimated to be around 4% of the total House bill. Eliminating the $10,000 cap is separate from the proposed direct aid to states and local governments.
Some other non-essential items are begging to be removed in my opinion.
How about the $1.75 Billion earmarked to build a new FBI headquarters, or the $377 Million for White House renovations? Do you remove various defense spending items, including replenishing funds that were redirected to build the wall? Or my personal favorite, what about a provision to protect financial institutions that serve the marijuana business? Weed protection in a coronavirus bill- only in America.
Election year politics at its finest is on display. Some help in my district for my vote, while at the same time, 27 million Americans are trying try to figure out how to make ends meet.
Look for something to pass eventually because neither side wants to allow the other to have credit for solutions nor be the Party held responsible if nothing passes. It is an election year!
Monetary and fiscal stimuli may be the two biggest drivers in the stock market’s recovery since the beginning of April. Providing help to Americans will likely continue until a vaccine becomes a workable solution to the virus.
Providing relief to people helps fuel stock market growth.
Earnings Season Nears its Conclusion
According to FactSet, with 89% of the S&P 500 companies reporting results, 83% of S&P 500 companies have reported a positive earnings surprise, and 64% have reported a positive revenue surprise.
Beating earnings estimates that have been tempered by the effects of the coronavirus is a good start.
There have been clear winners and losers during earnings season, contributing to the difference in returns between the NASDAQ and the S&P 500 year to date. But are companies really seeing growth across the board?
We have discussed in multiple MMQBs that the "haves", companies where social distancing guidelines have helped their business model, and the "have nots", companies where social distancing has to varying degrees crippled their businesses, are existing in polar opposite universes. Knowing that Amazon and Apple, to name a few, have grown during the crisis while significant names in retail have been filing for bankruptcy shows the stark contrast.
On average are companies growing, failing, or surviving?
For the second quarter, according to FactSet, the S&P 500 companies suffered an earnings decline of -33.8% !! Should this number hold through the remaining results of the 11% of companies yet to report, it will be the largest quarterly decline since the first quarter of 2009.
The key takeaway is the importance of continued fiscal and monetary support to the growth and health of both companies and people going forward. But, like all aid, the benefits are not distributed equally for all.
There will continue to be winners and losers, and it is vital to your portfolios to have the discipline that helps with investment selection not only across asset classes, but also within each individual investment class.
3 Keys to Watch Going Forward
Jobs – Our economy added jobs in July but at a slower pace than May and June. The stimulus is still needed.
School Reopenings – If schools do not open, roughly 45 million working parents with children under the age of 18 will be faced with a brutal decision – work or take care of their kids and supervise home learning. The answer will greatly affect not only the job numbers but also consumer spending going forward, the key driver of the U.S. economy.
The Virus – How long will it last? Without a vaccine, the next best thing is a reduction in flare-ups and statewide-spreading issues. With the virus rates starting to slow down in many of the hot spot states, finally, maybe we are turning a corner.
The future path of our economy is linked to virus control and people feeling confident enough to resume regular activities. Actions speak louder than words. Combing through data will remain a pivotal task to investment management going forward.