Bob’s Journal for 4/9

People who have tried to predict and bet on the stock indexes lately have been whipsawed.

After a lot of economic activity began grinding to a halt, the stock indexes tumbled. Since most of the world’s market indexes moved in lockstep, it doesn’t matter much which index we view.

At the lows of March 23, the indexes had declined more than 30% from the highs they had reached in late February.

Yet, the indexes are now more than 20% higher than those lows of only a few weeks ago. The S&P 500 and each of its sectors, except utilities, are trading above their highest March levels. Some analysts are saying that, according to their definitions, the bear market is over and a new bull market has begun.

If the bear market really is over, this would be the fastest and the sharpest turnaround ever for market indexes. The average bear market lasts about 11 months, and no bear market has ever lasted less than six months, according to The Wall Street Journal.

There are good reasons to believe that the indexes might not have reached their low points for this cycle.

The trading volume during this rally has not been nearly as high as it was during the decline. To verify a sustainable rally, technical analysts say that a surge in prices should be accompanied by very high trading volume, indicating that most investors are optimistic and buying more stocks.

Another measure to watch is the advance/decline line, which shows the ratio between stocks that are advancing in price to those declining in price. When the line is rising, it indicates that a majority of stocks are participating in the rally. In this rally, the advance/decline line is rising somewhat, but not rising sharply. That indicates the fact that the rally isn’t a strong one and many stocks are left behind.

Of course, the economy must do well for stocks to rebound. As the next item indicates, the economic stimulus efforts are off to a rough start. It appears that the markets are factoring in the most optimistic scenario for the resolution of the pandemic. Anything other than the most optimistic scenario is likely to cause another tumble in stock indexes.

The Stimulus Stumble

The laws that were recently enacted created several ways to inject money into the economy, but the distribution of money is slower than we had hoped.

The individual taxpayer rebates, known officially as economic impact payments, will begin to be issued soon. Even then, the automatic electronic payments will be made only to taxpayers who paid their taxes or received refunds electronically, as the government has their bank account information.

Other taxpayers will have to file forms to receive their rebates, and it could take months for them to obtain the payments.

Small businesses are eligible to receive loans that can be converted into grants so that they can continue paying employees, even if the employees aren’t working. The loans are available through the Small Business Administration (SBA) loan program.

Emergency grants of up to $10,000 also are supposed to be issued by the SBA within three days after an application is filed.

But small business advocates say the SBA is not issuing the grants within three days as promised by the legislation. The Wall Street Journal reports that small businesses aren’t hearing back from the SBA about the status of their applications or when grants and loans might be received.

In addition, funds for the loan program are running out. Congress approved $350 billion for the small business loans. But lenders say they’ve been inundated with requests for loans, and the SBA said it quickly recorded applications for more than 220,000 loans totaling more than $66 billion.

Congressional leaders said they plan to quickly approve funding for additional loans.

Some banks complained that the SBA was slow to issue rules on the loan program and that there are a lot of unanswered questions.

Another complication is that small businesses can choose to take tax credits or apply for a loan. The tax credits are refundable and can put money into a business’s account faster than the loan program. But the rules for both programs are complicated. Business owners say they are having trouble deciding which is the best option.

Be Wary of the Data

The economic data reports, many of them from the government, tell us what’s happening in the economy. I’ve mentioned over the last few weeks that a lot of the data that’s being reported covers periods before the orders for shutdowns and social isolation were issued.

But there also are reasons to be suspicious about the quality of the data we’ll see for the pandemic period.

Most of the data is generated through either surveys that are conducted by or reports that are submitted to government agencies. Those methods, even in the best of times, have inefficiencies and potential errors.

Now, there are additional problems.

Many government employees are working remotely. They don’t have their usual resources and tools.

In addition, many businesses are closed or have ordered their employees to work remotely. It is likely that not as many of them will respond to the surveys or file the reports. Those that do aren’t likely to have the same quality of data that they had before the pandemic.

The inflation reports are compiled by government employees who visit stores and record prices. With many stores closed, and people in many areas of the country ordered to shelter in place, few prices will be recorded.

I don’t know if the economy will be in better or worse shape than the data indicate for the next few months. But the data likely will be inaccurate when they are issued. The data will likely be revised significantly in the future.

The Data

New unemployment claims are the timeliest data for measuring real economic activity. Over the latest week, 6.6 million new claims were submitted, following a record 6.9 million new claims on the previous week. There is now a record 7.5 million Americans that are receiving unemployment benefits as of the end of March. The previous record was set in 2009.

Deflation is taking hold at the wholesale level. The Producer Price Index (PPI) for March was negative 0.2%, which follows a negative 0.6% in February. The PPI is 0.7% over 12 months.

A lot of that decline is due to the fall in energy prices. Excluding food and energy, the PPI was positive 0.2% in March and 1.4% over 12 months.

The confidence of small business owners declined in March, according to the National Federation of Independent Business (NFIB). The Small Business Optimism Index was reported at 96.4 for March, compared to 104.5 in February. That’s a steep drop, but a steeper decline is likely to come.

Consumer sentiment, as measured by the University of Michigan, declined sharply for April. The index was reported at 71.0, compared to 89.1 for March. The current conditions component declined to 72.4 from 103.7 last month. The expectations component was 70, compared to 79.7 last month.

This is the largest monthly drop in Consumer Sentiment and its worst level since 69.1 in December 2011. The low during the financial crisis was 55.3.

No doubt you saw the discussion regarding last Friday’s Employment Situation reports. The headline was that overall payrolls had declined by 701,000. Only seven reports since World War II had a sharper one-month decline in payrolls.

But, the Employment Situation reports are developed from two separate surveys. The business survey, known as the establishment survey, is the source of the official payrolls number. But the household survey found that 2.9 million fewer people were working than in the previous month.

Whatever the real number is, expect it to get significantly worse before it gets better.

The ISM Non-Manufacturing Index for February said that the service sector of the economy was declining but still holding up. The index declined to 52.5, compared to 57.2 in February.

The PMI Services Index Flash Composite Index for March showed a sharp decline in the sector. The mid-month services index for March declined to 39.8 from 49.4 in February. The composite index of both services and manufacturing declined to 40.9 from 49.6 in February.

Consumers were spending in February, according to the Consumer Credit report from the Federal Reserve. Overall, credit increased at an annual rate of 6.5%. Credit card balances increased at an annualized 4.5%, while other forms of credit, primarily student and vehicle loans, increased at a 7.0% annual rate.

The JOLTS (Job Openings and Labor Turnover Survey) report for February is dated at this point. But it indicated that even before the widespread shutdowns, the labor market was cooling. The number of job openings declined substantially in February.

The Markets

The S&P 500 rose 11.33% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 11.92%. The Russell 2000 increased 10.70%. The All-Country World Index (excluding U.S. stocks) added 7.25%. Emerging market equities jumped up 8.60%.

Long-term treasuries fell 1.17% for the week. Investment-grade bonds increased 3.71%. Treasury Inflation-Protected Securities (TIPS) added 1.59%. High-yield bonds gained 3.65%.

In the currency arena, the U.S. dollar increased 0.56%.

Energy-based commodities jumped 10.73%. Broader-based commodities rose 7.10%, while gold gained 3.43%.

Bob’s News & Updates

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