Bob’s Journal for 7/9/20
Some Notable Events That Grabbed My Attention This Week
The Wealthy Cut Their Spending
There was a lot of interesting information below the headlines of the recent reports on income and spending.
The stimulus programs Congress enacted beginning in March were designed to replace income that households and businesses lost due to stay-at-home policies.
The programs largely were successful. Many lower-income households in particular had a high percentage of their incomes replaced through either unemployment insurance or the subsidies to employers who maintained their payrolls. They were almost made whole.
But a lot of the marginal spending in the economy is driven by higher-income households, and things changed dramatically in those households. Some high-income households own businesses that were adversely affected by the pandemic. These households often didn’t have all their lost income replaced by the stimulus, because of caps on the amount of the federal assistance.
Also, high-income households that maintained their incomes during the pandemic dramatically increased their savings and reduced spending. The result is that while incomes bounced back in May and June, spending didn’t.
In fact, spending was reduced, and the highest-income Americans reduced their spending more than others.
The savings rate spiked to an all-time high. The personal savings rate, as reported by the Bureau of Economic Analysis, was 23.2% in May. The previous high was about 17% way back in 1975. The recent high was 12% in December 2012.
The spending decline was focused on goods and services that depend on in-person contact, including travel, hospitality, leisure and restaurants. There wasn’t a surge in home improvement spending and some other categories.
Of course, some households saved because they want to be prepared in case the effects of the pandemic last a long time or affect more of the economy.
I have said before that government actions have followed private sector moves during the pandemic instead of leading them. I think that will continue and some sectors won’t recover until people are convinced it is safe to have more contact with others.
Now Everyone Loves Gold
The price of gold is up about 20% so far in 2020 and is at its highest level in nearly nine years.
Money is flooding into exchange-traded funds (ETFs) that buy or are backed by gold.
Almost $40 billion was added to these funds in the first half of 2020. That already exceeds the previous annual record for flows to gold ETFs set in 2016, according to World Gold Council data published in The Wall Street Journal.
This is no surprise, because I’ve recommended the iShares Gold Trust (IAU) for a couple of years now.
Central banks will continue to flood the economy and markets with money until inflation rises. That makes gold more attractive than paper currencies.
Gold also is boosted by uncertainty about the path of the coronavirus. Add the usual geopolitical problems and the volatility in U.S. politics, and there are a lot of reasons investors should want to have some gold in their portfolios.
ETFs are the safest, most liquid way to own gold.
Gold could tumble if there’s a breakthrough in dealing with the coronavirus. Until that happens, it’s a good idea to have a portion of your portfolio in gold.
Warren Buffett Bets on Infrastructure
Warren Buffett’s Berkshire Hathaway (BRK-B) announced last Sunday that it was purchasing the natural gas storage and transmission business of Dominion Energy (D). This is a continuation of Buffett’s bet on infrastructure as a significant part of Berkshire’s portfolio.
The company already had a large position in freight railways. It also was a player in natural gas storage and transmission before the latest deal. The new deal will give the company about 15% of that market.
Infrastructure is an important part of our Retirement Watch portfolios.
Many infrastructure sectors have fairly reliable cash flows and distribute a significant portion of them to investors. Some of the sectors, such as toll roads, airports and energy, were hurt by the pandemic and might not recover for a while. But others remain essential to the economy.
Because of their high distributions, many infrastructure investments are good substitutes for bonds when government bond yields are near zero. The infrastructure investments have higher yields than bonds and have fairly low correlations with the stock indexes.
Infrastructure is a good addition to your portfolio. Ask Warren Buffett.
The Data
New unemployment claims declined for another week. Claims fell by 99,000 to 1.314 million in the latest week. This is the 14th consecutive week claims were lower than the previous week but the 15th consecutive week that new claims exceeded one million.
Continuing claims also declined by 698,000 to 18.06 million.
The service sector continues to improve from its lows during the spring.
The ISM Non-Manufacturing Index for June was reported at 57.1. That’s up from 45.4 in May.
The PMI Services Index also is improving but lagging. It was reported at 47.9 for June, compared to 37.5 in May.
In each of these indexes, any reading above 50.0 indicates an expansion of the sector and a reading below 50.0 indicates contraction.
Consumers continued to restrict their use of credit in May. Total consumer credit decreased by 5.3%, which follows a reduction of 20% in April.
Credit card use declined 29% in May and 65% in April. Auto and student loans increased 2.3% in May.
The labor market improved in May, according to the Job Openings and Labor Turnover Survey (JOLTS) report. Because businesses were reopening and rehiring, the number of hires increased by 2.4 million in May. That put the month’s total hires at 6.5 million. The jump produced the highest monthly number of hires ever for the report.
Likewise, the number of separations from employers decreased by a record 5.8 million to a total of 4.1 million.
The number of job openings increased to 5.4 million. Over 12 months, there was a net loss of 11.3 million workers employed.
The Markets
The S&P 500 rose 1.82% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 1.33%. The Russell 2000 increased 0.08%. The All-Country World Index (excluding U.S. stocks) added 3.56%. Emerging market equities surged 7.82%.
Long-term treasuries rose 0.69% for the week. Investment-grade bonds increased 0.48%. Treasury Inflation-Protected Securities (TIPS) added 0.32%. High-yield bonds gained 1.05%.
In the currency arena, the U.S. dollar fell 0.76%.
Energy-based commodities increased 2.49%. Broader-based commodities rose 3.11%, while gold added 2.07%.
Bob’s News & Updates
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