Bob’s Journal for 7/20/20

Some Notable Events That Grabbed My Attention This Week

Two headlines in today’s Wall Street Journal show how the pandemic has upended the economy.

In fact, the economy has changed rapidly. In addition, some businesses have been helped while others have been hurt badly.

One headline said, “U.S. Economy Posts Sharpest Downturn on Record.” It is about the decline in second-quarter gross domestic product (GDP), which I report below.

The other headline read, “Procter & Gamble Posts Biggest Yearly Sales Gain Since 2006.” Consumers rushed to buy household staples in the early stages of the pandemic, and that helped P&G greatly.

We should expect more rapid changes in the economy with the effects being unevenly distributed.

The Market Rally Shifts to a New Phase

Since the market bottom in March, investors have rapidly changed which stocks they favor.

In the first leg of the recovery from the March lows, almost all stocks moved higher. But technology, health care and energy stocks surged ahead of the average stock.

Once economic activity began to bounce back starting in mid-May, the surge in the indexes was led by a wide variety of service industry stocks, because those companies were hurt the most by the reduced economic activity and were most likely to benefit from reopening. Industrial and financial stocks also joined the leaders of that leg of the recovery.

In the third leg of the rally, most stocks fared poorly. The major indexes were either flat or slightly higher between June 8 and July 20.

During that period, a few large companies, mostly in the technology arena, continued to rise while most others faltered. The average stock declined about 5.7% during this period, according to Bespoke Investment Group. Smaller company stocks, value stocks and high-dividend stocks performed the worst.

The 50 largest stocks in the S&P 500 rose 2.53% during the third leg. The 50 smallest stocks declined 20.35%.

The market might have started a new rotation on July 20. Since then, the 50 largest stocks in the S&P 500 are down 0.67% while the 50 smallest stocks are up 1.5%, according to Bespoke. The value stocks and high-dividend stocks are up 1% or more during this period.

One way to track this trend is to compare the prices of two exchange-traded funds. The capitalization-weighted SPDR S&P 500 (SPY) tracks the S&P 500, so the largest companies tend to determine the trends of that exchange-traded fund (ETF). The other is the Invesco S&P 500 Equal Weight (RSP). As the name indicates, the ETF gives equal weight to each stock in the S&P 500. In that fund, the smaller companies exert much greater weight than in the SPY.

I’ve seen a lot of analysts in the last month or so say that the prices for the largest stocks, especially the tech giants, aren’t rational. But that doesn’t mean the market indexes have to decline.

Investors can continue to do what they’ve apparently been doing since July 20. They can take gains in the large company stocks that have led the rally for a while and buy stocks that lagged.

How’s the Economy Doing?

It’s harder to track the economy during the pandemic.

The situation changes faster than can be captured in the traditional economic data. Most of the data is obsolete before it is released.

That’s why lately I’ve been more focused on the weekly new unemployment claims and the continuing claims. They are the timeliest data we have about trends in the economy.

There are some other nontraditional sources of data that can help gauge the level of economic activity.

One source to consider is Descartes Labs. The most current data on the site isn’t easy to use, but it is free and interesting.

The firm tracks the locations of mobile devices around the country. The data can show how much people are traveling, both locally and beyond.

The charts and data show the sharp decline in activity once the pandemic took hold and the gradual increase beginning in May. The firm’s data are reported on both the state and county levels.

You can find similar and easier-to-use data at Apple Mobility. The Descartes data is supposed to be more comprehensive, since it tracks all mobile devices, not only Apple products.

Another free source is Google Trends. The firm reports on the popularity of different search terms throughout time.

The past reports indicate that searches for terms such as “Covid symptoms” tend to rise and fall in line with the number of new cases reported around the country.

Google search trends also can help spot companies whose sales are about to increase. Searches for products and services typically spike before sales increase. For example, searches for lawn care and camping increased early in the pandemic. Higher sales followed at home improvement stores and camp sites, such as those operated by Camping World (CWH).

The Data

New unemployment claims increased for the second consecutive week. Claims increased 12,000 in the latest week and claims from the previous week were revised upward to 114,000.

Total new claims for the latest week were 1.434 million.

Continuing claims also increased by 867,000 for a total of 17.018 million.

The economy stopped contracting in early July, according to the PMI Composite Flash Index.

The composite index for the economy in July was 50.0, compared to 47.9 in June. The July measure is a six-month high, and a reading above 50.0 indicates growth.

The manufacturing sector increased to 51.3 from 49.8. The services sector is still in contraction, rising to 49.6 in July from 47.9 in June.

New home sales spiked higher in June, rising 13.8% over one month and 6.9% over 12 months. The June sales number was the highest since 2007.

Pending home sales rose 16.6% in June and 6.3% over 12 months. That marks two months of sales increases. Each of the four regions tracked by the National Association of Realtors (NAR) had higher pending sales in June than in May, and only one region did not show an increase over 12 months.

Home prices were unchanged in May, according to the S&P Corelogic Case-Shiller Home Price Index. Over 12 months, prices increased 3.7%, compared to a 3.9% increase as of April.

The Kansas City Fed Manufacturing Index rose to 3.0 in July from 1.0 in June. That indicates modest growth in manufacturing in the Midwest, despite the reduced activity in oil and gas drilling.

The Dallas Fed Manufacturing Survey found that the Production Index increased to 16.1 in July from 13.6 in June. But the General Business Activity Index was still negative. It registered negative 3.0 in July, up from negative 6.1 in June.

The Richmond Fed Manufacturing Survey found the sector returned to growth in the mid-Atlantic. The index for July was 10, compared to 0 in June. That’s the first positive reading since March.

Durable Goods Orders increased 7.3% in June, compared to a 15.1% jump in May. A good part of the increase was in vehicles. Excluding transportation, orders increased 3.3% for the month. Core capital goods, which is a good measure of business investment, increased 3.3% in June, compared to a 1.6% boost in May.

Consumer confidence, as measured by The Conference Board, declined in July to 92.6 from 98.3 in June. The current conditions component of the index increased while expectations declined.

Gross domestic product (GDP) declined at a record 32.9% annualized rate in the second quarter, according to the first estimate for GDP. That compares to a 5.0% decline in the first quarter. Consumer spending fell almost 35% from the first quarter to the second quarter.

There’s no surprise in the data. We already knew economic activity declined substantially in the second quarter because of widespread reductions in economic activity. It will be interesting to see how much the data is revised in the next two estimates.

The Markets

The S&P 500 declined 0.53% for the week ended with Wednesday’s close. The Dow Jones Industrial Average fell 1.66%. The Russell 2000 gained 0.84%. The All-Country World Index (excluding U.S. stocks) added 0.78%. Emerging market equities rose 1.42%.

Long-term treasuries rose 1.31% for the week. Investment-grade bonds lost 0.01%. Treasury Inflation-Protected Securities (TIPS) added 0.44%. High-yield bonds gained 0.56%.

On the currency front, the U.S. dollar lost 1.68%.

Energy-based commodities increased 0.37%. Broader-based commodities rose 1.83%. Gold gained 5.38%.

Bob’s News & Updates

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