Bob’s Journal for 8/20/20

Some Notable Events That Grabbed My Attention This Week

The major stock market indexes continued climbing to new highs, but there were changes in the stocks pushing the indexes up.

As you are aware, the U.S. stock indexes had a very few stocks earning high returns while the rest of the stocks in the indexes lagged. The high-return stocks were mostly technology companies. Amazon.com, Apple, Facebook, Nexflix and a few others that soared while other stocks, on average, didn’t do much.

So far in August, there has been a reversal. The stocks that were leading the indexes were left behind.

In particular, cyclicals, energy, financials and industrials have been leading the way. Smaller stocks also are doing well.

The stocks that had the best returns previously were primarily those of very large companies. There was a historic gap between the returns of small company stocks and large company stocks.

In the last few weeks, the Dow Jones Industrial Average, which is dominated by non-technology companies, and the Russell 2000, which tracks the returns of smaller company stocks, had much higher returns than the S&P 500.

So far in August, the industrial sector of the S&P 500 is up 8% and the energy sector gained 5.5%. But the technology sector is up only 3%.

The Dow Jones Transportation Average, which is about as old-fashioned as companies can get, gained 9.7% so far in August.

These surges are partly the result of investors seeing signs that growth is spreading to new sectors of the economy. It also is the result of investors taking profits in the stocks that gained so much recently during the COVID-19 lockdowns before putting their profits into less-highly-valued equities.

If this rotation out of a few highly valued stocks into a broader range of stocks continues, there is a good possibility the stock indexes can continue rising before experiencing a substantial correction.

Social Security Reaches a Milestone

The retirement income program turned 85 last Friday, Aug. 14.

Today, the program provides an average monthly retirement benefit of more than $1,400. It supplies about 41% of the average retiree’s income, according to research by Secure Retirement Income.

About 53% of today’s retirees report that Social Security is their primary source of retirement income. As retirees age, Social Security becomes a more significant source of their income.

Yet, today’s pre-retirees who are aged 55 and older believe that won’t be the case for them. Only 36% say Social Security is likely to be their primary source of retirement income. And only 20% of those ages 20 to 54 believe Social Security will be their primary income source.

I hope they’re right, and that these pre-retirees are saving enough money to ensure Social Security is only a supplement to their other retirement income.

But past generations of retirees saw Social Security become very important to them. They found that longer life spans, inflation and retirement surprises made the inflation-indexed, guaranteed lifetime payments from Social Security critical to them.

That’s why it’s important to make the right decisions about Social Security. Claim your retirement benefits to maximize those benefits for the long term. And married couples should be sure to consider what will be available to the surviving spouse after one of them passes away. I’ve discussed these matters in detail in past issues of Retirement Watch. The discussions are available in the archive on the members’ section of the website.

How Important is the Fiscal Stimulus?

We’re about to find out how stable the economy is and how important the fiscal stimulus is.

Congress adjourned for its August recess without reaching an agreement on the extension of unemployment benefits and other stimulus measures enacted last March.

The expiration of the stimulus occurs at about the same time that many localities are talking about restricting economic activity because of increases in coronavirus cases.

The two sides were very far apart when negotiations were disbanded in early August.

It is likely the policymakers will reach an agreement shortly after Labor Day. The question is whether the economy has enough momentum to sustain its recent growth until then. The latest unemployment claims, which are discussed below, aren’t a good sign.

I’m also curious to see the effect of the expiration of the extra $600 in unemployment benefits. Will retail spending drop sharply because the money isn’t circulating in the economy? Or will a lot of the unemployed find jobs to replace the lost income?

I try to be optimistic. But I also will watch the data to see what’s really happening and will recommend changes in our strategies if needed.

The Data

New unemployment claims unexpectedly jumped above one million again, hitting 1.106 million for the latest week. In addition, last week’s number of claims was revised higher to 971,000 from 963,000. That makes an increase of about 135,000 new claims in the latest week.

The good news is that continuing claims declined to 14.8 million. For some perspective, the highest number of people receiving unemployment before the pandemic was 6.6 million in 2009.

Retail sales increased 1.2% in July. That fell about a percentage point below expectations, but it brought monthly sales above pre-pandemic levels. In fact, retail sales for July set a record high. Technically, “the seasonally-adjusted annual rate of sales in July” was a new record.

Also, June’s sales were revised about a full percentage point higher. Also, sales excluding autos and gas were above expectations. The bottom line is that retail sales were solid before the stimulus measures expired.

Industrial Production also brought good news. Production overall increased 3.0% in July. Manufacturing production increased 3.4%. Also, the initial figures for June were revised a little higher.

Manufacturing in the New York region was weaker in August than in July, according to the Empire State Manufacturing Survey. The survey’s index was reported as 3.7 in July, compared to 17.2 in June. The surge in July surprised many economists and the decline this month also surprised them.

The Philadelphia Fed Manufacturing Index also indicated the sector declined in July, but not by as much as in the Empire State survey. The index declined to 17.2 in July from 24.1 in June.

Low interest rates and other factors continue to help home builders. The Housing Market Index from the National Association of Home Builders (NAHB) rose to 78 in July from 72 in June. This index exceeded analysts’ expectations for the third consecutive month.

Housing starts increased in July by 22.6% from June’s level. Over 12 months, starts are up 23.4%. Single-family home starts increased 7.4% over 12 months.

The Leading Economic Indicators Index from The Conference Board increased by 1.4% in July. The June index initially was reported as a 2.0% increase, but this was revised higher to a 3.0% increase.

The Markets

The S&P 500 lost 0.06% for the week ended with Wednesday’s close. The Dow Jones Industrial Average fell 0.93%. The Russell 2000 declined 0.71%. The All-Country World Index (excluding U.S. stocks) dropped 0.66%. Emerging market equities fell 0.5%.

Long-term treasuries lost 1.12% for the week. Investment-grade bonds increased fell 1.11%. Treasury Inflation-Protected Securities (TIPS) declined 0.06%. High-yield bonds gained 0.01%.

In the currency arena, the U.S. dollar lost 0.40%.

Energy-based commodities increased 1.73%. Broader-based commodities rose 3.01%, while gold gained 1.81%.

Bob’s News & Updates

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