Bob’s Journal for 7/16/20
Some Notable Events That Grabbed My Attention This Week
Good News on the Coronavirus Front
There has been a surge of positive news in the last few days about the prospects for one or more vaccines against the coronavirus.
The German firm BioNTech, which is partnering with Pfizer on a vaccine, is indicating it plans to have a vaccine ready for regulatory approval by the end of 2020. If the vaccine is approved, the firm will produce more than one billion doses by the end of 2021, according to its CEO.
On Tuesday, scientists reported in The New England Journal of Medicine that an experimental vaccine developed by Moderna caused participants to develop antibodies. That is believed to be an indication the vaccine will work.
The next step for both vaccines is big Phase III trials. This phase for each vaccine will involve about 30,000 test subjects. Moderna’s latest trial involved only 45 people.
About 17 companies around the globe are believed to be testing vaccines in human trials of different scales. It is still a little early to be confident that an effective vaccine is near.
Many drugs show promise in early trials but fail in the more rigorous Phase III trial.
Also, these are publicly held companies. I’m always skeptical when early trial results are released. I believe the release is intended, at least partly, to boost the companies’ share prices.
Even so, it’s the best news we’ve had in a while. I know several scientists and doctors who believe at least one of the vaccines will be proven safe and effective and approved for distribution by the end of 2020.
The Economy Needs a Vaccine
The news about the global economy isn’t nearly as positive. The economy really needs a vaccine to be developed.
The major U.S. banks included in their latest earnings announcements substantial reserves against potential losses on loans.
JPMorgan Chase added $10.47 billion to its loan loss reserves. Wells Fargo, Citigroup and Bank of America added smaller but still substantial loan loss reserves.
The banks downgraded their outlooks for the economy. They now believe that substantial numbers of individuals and small businesses will have to default on their loans and credit cards because the economic recovery will be weak or will stall.
JPMorgan Chase forecast the unemployment rate will remain above 10% through the first half of 2021. It also is projecting that the government stimulus that currently is supplementing the incomes of many individuals and small businesses won’t be continued for the length of the recession.
The bank is forecasting a wave of defaults over the next 12 months.
Recent data from both Europe and Asia also was disappointing. While many nations in those continents have curtailed the spread of the coronavirus, the efforts inflicted substantial economic damage. The economies aren’t recovering rapidly. The decline in global trade also is hurting many countries.
For example, Singapore reported that in the second quarter its economy contracted at an annualized rate of 41.2%.
The United Kingdom reported very modest growth in May and indicated that its economy is about 25% below its February level.
While the second quarter should be the bottom for most of the global economy, the recovery will be slow and uneven. Even in the countries that have done the best in controlling the coronavirus, levels of economic activity remain about 70% of pre-coronavirus peaks.
What Will Be in the Next Stimulus Package?
The fiscal stimulus measures Congress passed quickly in March are expiring soon. Economic growth is fading. Will Congress enact new stimulus to sustain the economy?
Congressional leaders have been equivocal for a while, taking a wait-and-see attitude about the economy and progress containing the coronavirus.
Now, they seem determined to pass a package of additional stimulus by the end of July. But Congress’s July 4 recess doesn’t end until Monday, so there isn’t much time.
The new stimulus will have similarities to and differences from the previous packages. Congress is likely to spend less this time. The total probably will be no more than $1.5 trillion, unless the economy contracts again.
Look for more substantial aid to state and local governments. In previous stimulus, these governments received money targeted to help with COVID-19 testing and other additional costs of the pandemic.
The next package is more likely to give the governments money to replace lost tax revenue, so they don’t have to reduce services and lay off employees. States also are likely to receive funding to help with the additional costs of opening schools during the pandemic.
The additional unemployment benefits, payroll tax credits for employers and Paycheck Protection Plan loans also are likely to be extended, though there might be changes in the details of the programs.
Employers also are likely to receive some legal protection so they can avoid being sued by employees who contract COVID-19 after returning to work.
The biggest debate probably will be over whether to continue the extra $600 per week in unemployment benefits. That amount is likely to be reduced or have some conditions attached.
It is possible every person will receive another stimulus payment, but it will be less than the $1,200 issued last time. It also is likely to be about half that amount, and the income limit on who receives the check will be lower.
The Data
New unemployment claims declined by only 10,000 in the latest week, keeping the total around 1.3 million. It is the 16th consecutive week initial claims were above one million and the 15th consecutive week claims declined from the previous week.
Continuing unemployment claims also declined a little to 17.5 million.
Retail sales increased 7.5% in June compared to May, because more stores and restaurants reopened. The increase in May was revised higher to 18.2%. Excluding autos and gas, retail sales increased 6.7% in June.
Small business owners felt a lot better in June. The Small Business Optimism Index from the National Federation of Independent Business (NFIB) increased 6.2 points to 100.6. Eight of the 10 components of the index improved.
Yet, earnings trends over the last three months were a negative 35%, which is the lowest level since March 2010. In addition, capital outlays by small businesses remain at recession levels.
The Consumer Price Index (CPI) increased 0.6% in June, compared to a 0.1% decline in May. Over 12 months, the CPI is up 0.6%. Excluding food and energy, the CPI was up 0.2% in June and 1.2% over 12 months.
The Producer Price Index (PPI) declined 0.2% in June. Prices in the service sector declined 0.3%, but prices of goods increased 0.2%. The PPI had increased 0.4% in May but declined 1.3% in April.
Industrial Production is rebounding faster than the service sector. Production increased 5.4% in June, following a 1.4% increase in May. The manufacturing component of production increased 7.2% for the month, following a 3.8% increase in May.
The Empire State Manufacturing Survey indicates manufacturing improved in the New York area. The survey’s index was reported at 17.2 for July, compared to negative 0.2 in June.
The Philadelphia Fed Business Outlook Survey for July was positive but less so than in June. The General Business Conditions Index derived from the survey was reported as 24.1 for July, compared to 27.5 for June.
The Markets
The S&P 500 rose 1.79% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 3.14%. The Russell 2000 increased 3.59%. The All-Country World Index (excluding U.S. stocks) added 1.18%. Emerging market equities lost 0.87%.
Long-term treasuries rose 1.09% for the week. Investment-grade bonds increased 0.89%. Treasury Inflation-Protected Securities (TIPS) added 0.33%. High-yield bonds gained 1.00%.
In the currency world, the U.S. dollar fell 0.42%.
Energy-based commodities were unchanged. Broader-based commodities declined 0.44% but gold rose 0.35%.
Bob’s News & Updates
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