Bob’s Journal for 7/23/20
Some Notable Events That Grabbed My Attention This Week
Looking Beyond the Unemployment Claims Headlines
The employment market probably is worse than the weekly data indicate.
Most of the focus is on the number of new unemployment claims and the continuing claims. Those are very good measures of trends in the economy and labor markets.
A couple of new factors need to be considered during the pandemic. One factor is Pandemic Unemployment Emergency Compensation. This is a program created in March to provide additional benefits to individuals who were collecting unemployment compensation before the pandemic and then exhausted those benefits. (Before the pandemic, most states paid unemployment compensation for no more than 26 weeks.)
The number of people making new claims for the emergency compensation is reported separately from new regular claims. Indeed, claims under the emergency program have increased steadily and are nearing one million weekly.
There are almost as many people filing for the emergency compensation as file new claims for regular unemployment compensation. The result is the headline numbers substantially underreport the weakness in the labor market.
Another factor is the seasonal adjustments made to the weekly unemployment claims number. Seasonal adjustments are a useful statistical technique that most economists believe smooth out data and make it easier to identify and evaluate trends.
But seasonal adjustments are distorting how the pandemic is affecting the labor market. Because these aren’t normal times, the adjustments have the effect, at times, of turning negative data into positive data, according to axios.com.
These are reasons to be cautious with your investments and not be caught up in arguments that the economy will turn around quickly.
Momentum Rules the Indexes
The stock indexes have been moving steadily higher since mid-March. More and more of that increase is propelled by a few stocks.
The stocks that account for much of the gains in the indexes are of technology and health care (primarily pharmaceutical) companies. Key names in this rally for the Nasdaq are Tesla (TSLA), Moderna (MRNA), Amazon (AMZN) and Plug Power (PLUG).
Prices of these stocks are rising primarily because momentum investing is dominating the markets.
Whether they use trading algorithms, apps, or some other method, momentum investors are pushing these stocks higher. Momentum investors buy stocks simply because their prices are increasing and sell stocks whose prices are declining.
Momentum investing as a winning strategy was discovered by academic researchers years ago. Professional investors have used it as one factor in their strategies for a long time.
More recent technology, especially apps produced by some online trading brokers, enabled investors to use momentum easily as the sole factor in investment decisions.
Momentum as a sole investment criterion is one of those strategies that works well until it doesn’t. At some point, a stock’s price reaches a point that makes enough investors uncomfortable that their selling drives it down. Or fundamental factors of the company do not match the recent price, so some investors sell and break the momentum.
When these high-flying stocks fall, there’s a good possibility the money will flow into other stocks and keep the market indexes rising.
But that’s not a sure thing. Market data indicate a lot of the momentum investors are new to investing and haven’t experienced losses. They might leave the markets for a while after they see the other side of momentum, and that would be bad for the indexes.
When Family Loans Become Gifts
A recent Tax Court case shows how easy it is for tax-free loans to family members to turn into big tax problems.
In one case, a mother regularly gave money to her children. She kept good records in which these transfers were listed as loans.
In general, she expected the loans to be paid back by the end of the year. If they weren’t, she regarded them as gifts to the extent that they would be tax free using the annual exclusion or lifetime exemption.
But one of her children suffered long-term financial reversals. She gave him money and recorded the transfers as loans.
But she didn’t try to force repayment and eventually worked with her estate planner with the expectation the money wouldn’t be repaid. She even established interest rates to accrue on the loans.
As a final move, the mother provided in her will and trust that the son’s inheritance would be reduced to the extent the loans plus interest weren’t repaid. Instead, the money would be inherited equally by the other children.
The IRS decided it didn’t like this arrangement.
The IRS argued the transactions actually were taxable gifts to the son.
The Tax Court agreed, to a point. It ruled that the transactions initially were loans. But once the mother realized her son’s financial condition was such that the money never would be repaid, the transactions became gifts. The estate owed gift taxes for the year the court determined the mother realized the money wouldn’t be repaid.
(Estate of Mary P. Bolles v. Commissioner, T.C. Memo. 2020-71)
The Data
New unemployment claims increased after 15 straight weeks of declines. Claims increased by 109,000, to a total of 1.416 million for the latest week. That’s the 18th consecutive week claims were above one million.
Continuing claims declined by 1.107 million to 16.197 million. But continuing claims data lag the new claims by one week.
New home builders are feeling better in July. The Housing Market Index from the National Association of Home Builders (NAHB) increased to 72, which is sharply higher than the 58 reported in June. That puts the index just below the cycle highs reached in late 2019 and early 2020.
Housing starts jumped higher in June. They rose 17.3% above May’s number. Single-family home starts increased 17.2% in June.
But starts still are down 4.0% over 12 months and are up only 0.7% for the year to date. Single-family home starts are down 3.9% over 12 months.
Existing home sales increased 20.7% in June from the May level. Over 12 months, however, sales still are down 11.3%. The inventory of existing homes for sale is 18.2% lower than 12 months ago.
House prices declined in May, according to the FHFA House Price Index. The index declined 0.3% for the month, compared to a revised 0.1% increase in April. Over 12 months, the index is up 4.9%.
Consumer sentiment, as reported by the University of Michigan, declined a bit in July. The index was reported at 73.2 for July, compared to 78.1 for June. This brings the index near its April level.
The Leading Economic Indicators Index from The Conference Board increased by 2.0% in June, and May’s index was revised higher to an increase of 3.2%. That indicates modest growth for the next six months.
The Markets
The S&P 500 rose 1.56% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 0.48%. The Russell 2000 increased 0.73%. The All-Country World Index (excluding U.S. stocks) added 0.86%. Emerging market equities edged up 0.90%.
Long-term treasuries rose 0.87% for the week. Investment-grade bonds increased 1.29%. Treasury Inflation-Protected Securities (TIPS) added 0.75%. High-yield bonds gained 1.65%.
In the currency arena, the U.S. dollar declined 1.12%.
Energy-based commodities increased 1.03%. Broader-based commodities rose 2.32%. Gold increased 3.00%.
Bob’s News & Updates
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