Bob’s Journal for 8/27/20

Some Notable Events That Grabbed My Attention This Week

Big changes were announced in the Dow Jones Industrial Average (DJIA) this week to take effect Aug. 31.

The DJIA is composed of only 30 stocks. Unlike the other major stock market measures, the DJIA is price-weighted. The higher a stock’s price, the greater a percentage of the DJIA it is. Most other market measures are capitalization-weighted.

The changes were prompted by Apple’s (AAPL) recent announcement that it will have a four-for-one stock split effective Aug. 31. AAPL currently is 12.20% of the DJIA. After the split, it will be 2.99%. AAPL has been a major factor in the DJIA’s return this year, accounting for about 1,455 points in the DJIA’s increase in 2020.

Also, technology currently is more than 27% of the DJIA, but its share would decline substantially following the stock split, if changes weren’t made in the DJIA’s composition.

Leaving the DJIA will be Exxon Mobil (XOM), Pfizer (PFE) and Raytheon (RTX). Joining the DJIA will be Salesforce (CRM), Amgen (AMGN) and Honeywell (HON).

After the switch, technology’s share of the DJIA will decline to 23.1%. Health care’s share will increase to 18.6% from 14.2%. Though “industrial” is in the name, industrial stocks will be only 15.3% of the DJIA after the changes.

The stocks with the largest share of the DJIA after the changes are United Health (UNH) at 7.34% and Home Depot (HD) at 6.81%. The only other stocks with more than 5% of the DJIA will be Microsoft (MSFT) and McDonald’s (MCD).

ETFs Continue to Mature

Only a few years ago, financial firms were issuing exchange-traded funds (ETFs) as fast as they could, and the volume of such funds exceeded the number of individual stocks on the major exchanges.

The boom period for the ETF industry is in the past. So far this year, more ETFs have been closed or liquidated than have been launched.

Only 161 new ETFs have been launched while 188 have been closed. That’s the highest number of closings in a year in the short history of ETFs, and we still have a lot of time left in 2020.

ETFs that don’t attract enough investment money are those most likely to be closed. Even the largest ETF issuers, such as BlackRock and Invesco, no longer will support unpopular ETFs simply to fill out their line ups or in hopes the funds will catch on eventually. Generally, if an ETF doesn’t attract at least $50 million, it isn’t profitable.

Another reason so many ETFs have been closed is that Invesco purchased the ETFs of two other firms. Many ETFs were closed or merged to avoid duplication of offerings.

Some ETFs — including exchange-traded notes (ETNs) — were closed because of the extreme market volatility this year. Leveraged funds, which promise two or three times the return of an index or its inverse, had a particularly harrowing year. Several leveraged commodity funds were closed in the spring after the collapse in oil prices brought the prices of the ETFs below $1.

ETFs began as a simple product designed to mimic the return of a major stock index at a lower cost and with more liquidity than an index mutual fund. The creative minds on Wall Street, however, morphed them into something very different. That forced investors to stay on their toes and understand the products they’re considering.

IRS Isn’t Optimistic About the Recovery

While some analysts still hope for a quick recovery in the employment market, the IRS isn’t so hopeful.

As part of its forecasts of future workload, the IRS estimates the number of W-2 and 1099 forms that it expects will be filed each year. These forms report the amounts paid to employees and independent contractors.

The IRS expects weakness in the labor market to continue for several years. Specifically, the IRS forecast that there will be 229.4 million employee positions in the economy in 2021. That’s 37.2 million fewer than it forecast last year for 2021.

Further, the IRS forecast a reduced number of jobs will continue into at least 2027. It estimates about 15.9 million fewer forms will be filed that year than it previously forecast.

The IRS also expects far fewer forms reporting interest income will be filed through 2027, indicating interest rates are expected to remain very low.

No one has measured how accurate the IRS’s forecasts have been in the past. But the data are one example of the view of an organization that needs to make a reasonably accurate estimate to manage its budget and workflow.

The Data

New unemployment claims for the latest week were 1.006 million, which is about 98,000 lower than last week’s 1.104 million claims. That means we still have had only one week in the last 23 when claims were less than one million.

Continuing claims declined by only 223,000 to 14.535 million.

Existing home sales increased 24.7% in July from June. That’s the highest monthly sales level since December 2006 and is an 8.7% increase over 12 months.

House prices rose 0.2% in June, according to the S&P Corelogic Case-Shiller House Price Index. Over 12 months prices are up 3.5%.

The Federal Housing Finance Agency (FHFA) House Price Index reported that house prices increased 0.9% in June. This compares to a 0.2% decline in May. Over 12 months, the index increased 5.7%.

The Case-Shiller index averages prices over three months to calculate the “monthly” change it publishes. The FHFA index is a simple month-to-month change.

New home sales increased by 13.9% from June to July. That is a 36.3% increase over 12 months. Also, the sales numbers from the three previous months were revised higher. The July sales were the highest since 2007.

The average price of the new homes sold increased 2.5% from June to July but still is down 1.9% over 12 months. The average price remains 3.9% below the recent peak in 2017.

Pending home sales increased by 5.9% in July from June’s level, according to the National Association of Realtors (NAR). Over 12 months, pending sales increased 15.5%. Sales might be higher, but the inventory of homes for sale is the lowest since NAR began tracking the data in 1982.

Consumer confidence, as measured by The Conference Board, declined to 84.8 in August from 92.6 in July. That marks the second straight monthly decline and the lowest level since May 2014.

The “present situation” component of the index declined significantly to 84.2 from 95.9 in July.

Manufacturing in the mid-Atlantic improved in August. The Richmond Fed Manufacturing Index rose to 18 from 10 in July.

Durable Goods Orders soared in July, increasing by 11.2% from June’s level. But most of the increase was in automobile orders.

Excluding transportation, orders increased 2.4%, compared to a 4.0% jump in June. Core capital goods orders, which are a major signal of business investment, increased only 1.9% in July compared to a 4.3% increase in June.

Economic growth increased a bit in the first half of August, according to the PMI Composite Flash Index. The composite increased to 54.7 from 50.0 in July. The manufacturing component increased to 53.6 from 51.3. The services component had the biggest increase as more businesses re-opened. The services component increased to 54.8 from 49.6.

The second estimate of second-quarter gross domestic product (GDP) was a slight improvement. The annualized growth rate was estimated at a negative 31.7%, compared to negative 32.9% in the initial estimate.

The Markets

The S&P 500 rose 3.07% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 2.38%. The Russell 2000 lost 0.63%. The All-Country World Index (excluding U.S. stocks) added 1.54%. Emerging market equities increased 2.58%.

Long-term treasuries rose 0.18% for the week. Investment-grade bonds lost 0.04%. Treasury Inflation-Protected Securities (TIPS) added 0.61%. High-yield bonds gained 0.88%.

In the currency area, the U.S. dollar fell 0.12%.

Energy-based commodities increased 0.71%. Broader-based commodities rose 0.60%, while gold added 0.54%.

Bob’s News & Updates

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