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Bob’s Journal for 7/2/20

Published on: Jul 02 2020

Some Notable Events That Grabbed My Attention This Week

I’ve been saying it for a while, but other analysts are coming around to my view of the economy.

Investors and analysts have been trying to predict which letter of the alphabet the economic recovery from the pandemic will most resemble.

Initial predictions were for a V-shaped recovery, but those mostly have been abandoned in favor of other letter-based forecasts.

I’ve been saying for a while the recovery isn’t likely to resemble any of the letters of the alphabet. Instead, it’s most likely to resemble a modified square-root symbol. I discussed the idea in some detail in the June 2020 Retirement Watch Spotlight Series online seminar.

The idea is gaining supporters.

This week an article in The Wall Street Journal by Greg Ip reported the recovery is most likely to resemble a “reverse square root” symbol.

The sharp recovery from the bottom is fading as additional businesses fail to open and some that opened are closing again or losing sales. In other words, the recovery is either flattening or starting to decline after surging.

We’re in the most precarious part of this recovery. It is a good time to be cautious with your finances.

The Tide Is Rising but Choppy

This was a quarter for the stock index record books.

The sharp drop in the indexes in February and most of March was followed by a strong rally. Bespoke Investment Group describes the recovery from the March low to the end of June as “the best 100 calendar days in over 80 years” for the S&P 500.

The index faltered a bit in the last week of the second quarter, so it didn’t set all the records it was on track to for last week. But it still was a strong quarter. The return was 20.16%, making it the best quarter since 1998.

But stock indexes didn’t have equal recoveries from the low point.

The NASDAQ 100 led the way with a 30.27% return for the quarter ended June 30. The index rose 16.91% for the year to date and 33.66% over 12 months.

But the S&P 500 still was down 3.18% for the year to date and up only 7.37% over 12 months.

The All-World Index (excluding U.S. stocks) was up 16.20% for the second quarter. It still was down 10.93% for the year to date and 4.92% over 12 months.

Broad-based emerging markets had about the same returns as the All-World Index for each period.

But returns vary considerably between regions and countries.

The iShares Asia 50 ETF (AIA) was up 16.50% for three months. It was down only 1.67% for the year to date and was up 7.68% over 12 months.

The iShares Latin America 40 (ILF) jumped 19.58% for the second quarter. But it fell 35.72% for the year to date and 34.18% over 12 months.

You can see similar differences when looking through the returns for different stocks, market sectors and country indexes.

In addition, bond investors also had a wild ride. The iShares 20+ Year Treasury Bond ETF (TLT) lost 0.23% in the second quarter. But its earlier returns were spectacular. It still was up 21.87% for the year to date and 25.88% over 12 months.

Those who held the U.S. stocks that were doing well before the pandemic lost a lot of money during the market decline in February and March, but they more than recovered those losses if they held their positions. Investors using other strategies had a tougher time earning positive returns.

I expect most stocks will be stagnant until there are clearer indications of how the economic recovery will develop. If new fiscal stimulus isn’t enacted, the economy and markets are likely to slip.

Good News for REIT Mutual Fund Investors

Shareholders of mutual funds that invest in real estate investment trusts (REITs) benefit from the 20% business pass-through income deduction. The IRS recently made that official.

The deduction was created by The Tax Cuts and Jobs Act enacted in 2017.

Some business entities aren’t taxed on their income. Instead, the income passes directly to the individual tax returns of the owners and is taxed to the owners. Such entities include real estate investment trusts (REITs), partnerships and subchapter S corporations. Under the 2017 law, many of the owners are entitled to a deduction equal to 20% of that pass-through income.

It wasn’t clear from the tax code if shareholders of mutual funds that invest in REITs instead of owning them directly were entitled to take that deduction on the mutual fund distributions of REIT income.

Regulations issued by the IRS on June 24 make clear that mutual fund shareholders are entitled to the 20% deduction on their distributions related to REIT investments of the funds. The shareholders also must meet the income limits and other qualifications of the deduction.

That’s good news for investors in my recommended Cohen & Steers Realty Shares (CSRSX).

The Data

Household spending and income data reflect the wild shifts in the economy. In May, consumer spending increased by a one-month record 8.2%, which follows a 13.6% decline in April.

Yet, personal income was down 4.2% in May, which compares to a 10.5% increase in April. The April increase largely was due to stimulus payments from the federal government.

Inflation, as measured by the PCE Price Index, is almost non existent. That index increased only 0.1% in May and 0.5% over 12 months. Excluding food and energy, the core index increased 0.1% in May and 1.0% over 12 months.

Manufacturing appeared to improve again in June, according to most of the surveys issued in the last week.

The ISM Manufacturing Index increased to 52.6 from 43.1 in May.

The PMI Manufacturing Index increased to 49.8 in June from 39.8 in May.

Any reading above 50.0 in those indexes indicates growth.

The Kansas City Fed Manufacturing Index finally crept into positive territory. For June, it was reported at 1, compared to a negative 19 in May.

The Dallas Fed Manufacturing Survey also showed the sector improving. The General Activity Index of the survey was reported at negative 6.1 in June, compared to negative 49.2 in May. The Production Index was positive 13.6, up from negative 28.0 in May.

The Chicago Purchasing Managers Index continues to indicate business in that region is in a recession. The index rose to 36.6 in June from 32.3 in May. Economists expected a more significant improvement.

Factory Orders support the notion that manufacturing is improving. Orders increased 8.0% in May, compared to a 13.5% decline in April. Over 12 months, orders are down 9.2%.

Consumer Sentiment, as measured by the University of Michigan, declined a bit in June. The index was reported at 78.1, down from 78.9 in May.

But Consumer Confidence, as measured by The Conference Board, increased to 98.1 in June from 85.9 in May.

There was a significant increase in the Present Situation component of the index. It rose to 86.2 from 68.4.

Pending home sales rebounded significantly in May. After declining 20.8% in March and 21.8% in April, the Pending Home Sales Index from the National Association of Realtors (NAR) increased 44.3% in May.

Home prices edged higher in April, according to the S&P Corelogic Case-Shiller Home Price Index. Though sales were down that month, prices nationally were 0.3% higher. The 12-month increase was 4.0%.

There’s significant inconsistency between the government’s jobs reports and ADP’s.

The June Employment Situation reports were better than economists expected. Payrolls increased by 4.8 million compared to expectations of 2.9 million. The increase was the highest in the history of the report by a wide margin. In May the number of jobs had increased by 2.7 million.

It is important to note that the surveys for the report were conducted in mid-June. The data don’t reflect the renewal of restrictions and shutdowns that occurred later in the month as more coronavirus cases were reported.

Average hourly earnings declined 1.3% for the month but are up 5.0% over 12 months.

The ADP Employment Report of private sector payrolls disappointed economists. It recorded 2.369 million new jobs in June. Economists expected over three million new jobs. The largest job gains by far were in service-providing businesses, especially in leisure and hospitality.

The May number, however, was revised substantially higher from last month’s report. Initially, a loss of 2.76 million jobs was reported for May. The number was revised this month to a gain of more than three million jobs. That’s quite a turnaround.

New unemployment claims continued their steady decline, though they still are high by historic standards. There were 1.427 million new claims in the latest week. That’s a decline of 55,000 claims from the previous week.

The number of claims was higher than expected and is the 15th consecutive week of claims exceeding one million.

Continuing claims increased by 59,000 to 19.29 million after falling for several weeks. I think at this point continuing claims are the timeliest measure we have of how quickly the economy is bouncing back. They show the economy has hit a plateau.

The Markets

The S&P 500 rose 2.11% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 1.05%. The Russell 2000 increased 2.50%. The All-Country World Index (excluding U.S. stocks) added 0.83%. Emerging market equities edged up 0.45%.

Long-term treasuries rose 0.36% for the week. Investment-grade bonds increased 1.34%. Treasury Inflation-Protected Securities (TIPS) added 0.28%. High-yield bonds lost 0.26%.

On the currency front, the U.S. dollar fell 0.04%.

Energy-based commodities increased 3.06%. Broader-based commodities rose 3.15% but gold declined 0.30%.

Bob’s News & Updates

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Seriesclick here.

A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

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