Bob’s Journal for 5/21/20

Some Notable Events That Grabbed My Attention This Week

More Worries About Social Security’s Solvency

I’ve been writing for a while that the pandemic is going to have a serious, long-term affect on the solvency of Social Security.

Others are crunching the numbers and agreeing. Earlier, I cited a study from the Center for Retirement Research (CRR) at Boston College that said the pandemic recession would cause the trust fund to be depleted two years earlier than the currently forecast 2034.

I said the CRR projection seemed too optimistic, because I believe this economic downturn will be steeper and last longer than the historic numbers CRR used.

More recently, the Bipartisan Policy Center did an analysis that included four different scenarios. This analysis shows the retirement trust fund being depleted before 2030 in all scenarios.

Congress is going to have to deal with Social Security’s problems sooner than was anticipated a few months ago. Some in Congress, in both parties, are realizing that, as this article in politico.com reveals.

The big question is whether it will simply try to modify the existing program so that most of the currently promised benefits will be paid or enact a large-scale change in support for those 65 and older.

The outcome will hinge on the results of this year’s election for both President and Congress.

The Uneven Recovery in Stocks

The stock indexes made a significant recovery from their lows of March 23, but stocks aren’t participating equally in the recovery.

Often when the stock indexes bounce back from a steep decline such as the one experienced from Feb. 19 through March 23, the rally is broad. The rising tide lifts all stocks.

That isn’t the case this time.

As of May 12, the S&P 500 was 15% below the all-time high it recorded on Feb. 19. Yet, the health care sector was only 5.29% below its Feb. 19 level. Consumer staples were down 9.11%, and technology had slid 12.25%.

On the other end of the spectrum, the energy sector had dropped 37.24%, and financials had fallen 30.55%. Real estate stocks had declined 29.78%, and consumer discretionary stocks were down 28.46%.

Within the health care sector, the pharmaceuticals, biotechnology and life sciences industry group nosed up 1.2% above its Feb. 19 level.

Though the index was down from its peak, more than 12% of the individual stocks in the index were above their Feb. 19 prices. The top-performing stocks since Feb. 19 are an interesting group.

At the top of the list is a financial stock, MarketAccess Holdings, which operates an online global bond trading service. It fell only 17.67% when the indexes were tumbling. But it gained 79.52% following the market bottom, so by May 12, it was 47.80% above its Feb. 19 price.

DexCom, which provides health care equipment and services, fell 27.90% from the Feb. 19 peak to the March 23 low. It gained 97.68% from the market bottom to May 12 and was up 42.53% since Feb. 19.

Pharmaceutical firm Regeneron rose 13.68% while the indexes were declining and gained another 24.59% from the index bottom. On May 12, it was 41.63% higher than on Feb. 19.

Domino’s Pizza rose 9.01% from Feb. 19 through March 23, then rose another 17.51% from March 23 through May 12. That left the stock 28.09% above its Feb. 19 price.

It is no surprise that the stocks that remain far below their Feb. 19 prices are engaged in businesses related to oil, airlines, cruises and retail stores.

Investors have been very selective since the market bottom. They’re also making a statement. Most investors don’t believe we’ll quickly return to our pre-pandemic lifestyles. They see continued reduced demand for travel, leisure and energy.

Capital Investments Are Slashed

Before the pandemic, one of my concerns about economic growth was the lack of business investment.

The economy can’t grow for an extended period unless businesses invest in plants and equipment. The post-financial crisis period was an exception, because there were so many unemployed and underemployed following the crisis. It was cheaper and more efficient for businesses to hire more people instead of investing in equipment.

As unemployment declined to historic lows, businesses needed to invest to increase productivity and output. There were signs in 2019 that businesses recognized that reality and were preparing to increase their investments.

The pandemic ended many businesses’ capital investment plans.

Before the pandemic, corporate announcements indicated that in 2020 there would be a net increase in business investment in most sectors of the economy. Only energy and industrials had plans to reduce investments.

Following the pandemic, plans have changed. Only utilities continue to plan higher capital investments in 2020. The investment declines by technology and communications services companies will be less than 1%.

Overall, business investment is estimated to decline by 13% in 2020, compared to 2019.

Business investment is an important component of GDP. Lower business investment will reduce GDP for the year.

The Data

New unemployment claims increased by 2.4 million. That’s the seventh consecutive week in which the number of new claims was lower than the previous week. Yet, almost every one of those weeks would have set a new weekly record before the pandemic. The total number of new claims during the pandemic period is 38.6 million.

The number probably still is low. People in several states continue to say it is difficult to apply for benefits using the automated filing processes. Also, self-employed individuals are newly eligible for unemployment benefits thanks to a change in the CARES Act. But many state systems still haven’t incorporated them into their systems, so they aren’t included in the numbers.

Retail sales declined a record 16.4% in April, a considerably larger drop than most economists expected. This follows an 8.3% decline in March, which was the record at the time.

Only grocery stores had sales increases. Clothing stores had the largest decline, 78.8%. Electronics retailers’ sales dropped 60.6%, and sales at bars and restaurants slid 29.5%.

The manufacturing sector might have improved a bit in April, according to the Empire State Manufacturing Survey. The survey’s index came in at negative 48.5, compared to a negative 78.2 in March. Though a very bad report, it was considerably better than economists’ estimates.

Likewise, the Philadelphia Fed Business Outlook Survey improved to a negative 43.1 in May from a negative 56.6 in March.

Industrial Production declined 11.2% in April, compared to a 5.4% decline in March. Manufacturing declined 13.7%, compared to 6.3% in March. The capacity utilization rate, which had held steady around 78% in recent years, tumbled to 64.9% in April, compared to 72.7% in March.

Consumer Sentiment, as measured by the University of Michigan, actually increased a little in May to 73.7 from 71.8. The survey showed that consumers liked the stimulus checks and widespread discounting by retailers.

Sentiment toward current economic conditions increased to 83 from 74.3 in April. But expectations declined to a six-year low of 67.7, compared to 70.1 for April.

The Job Openings and Labor Turnover Survey (JOLTS) report changed dramatically. The report lags other reports by a month, because it has more details.

The JOLTS report for March found that after years of little change from month to month, job separations increased to 14.5 million, with 11.4 million being layoffs and discharges. Job openings declined to 6.2 million. Only 12 months ago there were 7.364 million job openings.

Existing home sales in April declined 17.85% from the March level. That’s the largest one-month decline since July 2010. For the past 12 months, sales are down 17.2%.

One reason sales are down is the inventory of homes for sale is 19.7% lower than 12 months ago. April had the lowest inventory level recorded.

The median price of a home sold rose by 7.4% over 12 months. That brings the median price to $286,800, a record high for this report, without making adjustments for inflation.

Home builders are a little more optimistic in May than in April, according to the Housing Market Index from the National Association of Home Builders. The index rose to 37 from 30. That’s a long way from the 76 it recorded last December.

Housing starts tumbled in April. They declined 30.2% from March’s level and are down 29.7% over 12 months. Single-family home starts were down 24.8% over 12 months.

This decline, though steep, is less than in many other sectors of the economy. Home construction is considered an essential activity in many states, so it wasn’t restricted by government orders.

The overall economy improved a little bit in the first half of May, according to the PMI Composite Flash Index. The manufacturing index increased to 39.8 from 36.9 in April. The services index increased to 36.9 from 27.0. The composite increased to 36.4 from 27.4.

The Leading Economic Indicators index from The Conference Board declined 4.4% in April. March’s decline was revised to 7.4% from 6.7%. The decline in March was the largest in the index’s history. The Conference Board said the index declines of the last two months indicate the economy is in a recession and that there won’t be a fast rebound for the economy at large.

The Markets

The S&P 500 rose 5.44% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 5.75%. The Russell 2000 increased 9.19%. The All-Country World Index (excluding U.S. stocks) added 3.75%. Emerging market equities edged up 3.41%.

Long-term treasuries lost 0.83% for the week. Investment-grade bonds increased 2.95%. Treasury Inflation-Protected Securities (TIPS) added 0.46%. High-yield bonds gained 2.76%.

In the currency arena, the U.S. dollar declined 1.03%.

Energy-based commodities increased 10.71%. Broader-based commodities rose 6.11%, while gold added 2.01%.

Bob’s News & Updates

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