Bob’s Journal for 8/6/20

Some Notable Events That Grabbed My Attention This Week

The stock market appears to be dividing into an increasingly smaller group of haves and much larger have-nots.

The Nasdaq 100 has been the best-performing index for a while. But most of its members have not participated in the latest surge.

For example, though the index had a strong rally in the last week, three-quarters of the stocks in the index declined, according to Bespoke Investment Group.

The sector weightings in the S&P 500 offer another example. The technology sector now is 27.19% of the index’s weight. Back in 1990, tech was only 6.34% of the S&P 500. In 2018, it was 20.15% of the index.

Historically, the index has been somewhat equally weighted between the sectors, with most sectors weighted between 10% and 20%. Now, only four sectors have more than a 10% weight, and financials have a 9.9% share.

In 2020, financials lost more than 3% of their share of the S&P 500, while energy and industrials each lost more than 1%. Technology increased its weighting by more than 4%. Consumer discretionary, which is primarily Amazon, increased its weighting by 1.5%.

There are a few signs that the market rally might be about to broaden to include more stocks. So far, however, a relatively few big-name stocks have captured most of the gains. Since early June, most stocks have been flat or down, while those few large company stocks continued to appreciate.

The Stock Market Anticipates

The old adage is to buy on the rumor and sell on the news.

That would have been a good practice in the last few months.

The stock indexes began rising in March when the economy still was in distress. Many analysts argued that there was a disconnection between the economy and stock market, with the market being much more positive than economic data warranted.

Now, it seems investors were correct to anticipate a strong rebound in the economy that would improve corporate earnings.

The reports in the latest earnings season so far have been better than estimates. Almost 80% of companies reporting so far beat the consensus earnings estimates. Almost 70% beat revenue estimates.

Though prices of technology stocks were surging and leading the indexes higher, and that was accompanied by anticipation of higher earnings, almost 90% of technology companies still beat their earnings estimates. As optimistic as investors were before earnings season, they weren’t optimistic enough.

Yet, the prices of many stocks stalled as earnings were reported.

It seems that in the second quarter, the market operated as a forecaster. Expectations of positive earnings pushed stock prices higher. Once the earnings reports confirmed the optimism, investors pulled back.

Perhaps investors are anticipating another slow down in the economy as coronavirus cases increase and there is widespread discussion about closing down parts of the economy again.

Measuring the Economy

I explained last week that traditional economic indicators, such as gross domestic product (GDP), aren’t helpful today. The economy is changing too rapidly.

I pointed out that new unemployment claims and continuing unemployment claims are more timely measures of what’s happening in the labor market and the overall economy.

There are a couple of other timely and sensitive measures of the economy to consider.

The Economic Tracker from Opportunity Insights and Harvard University tracks consumer spending and breaks it down in several ways.

The tracker found that spending by high-income households remains well below pre-pandemic levels while spending by lower-income households is only 4% below pre-pandemic levels.

The spending lag by higher-income households appears to be largely by choice. Concerns about contracting the virus are curtailing discretionary spending, such as entertainment and travel.

The New York Federal Reserve Bank publishes a Weekly Economic Index. The index collects 10 data reports that are published weekly or daily and scales them to estimate likely GDP growth.

Both these measures recently began indicating that the recovery recently reached a plateau. It is not clear yet if this is a pause in the recovery, a long-term plateau, or the start of a new downturn.

The Data

New unemployment claims declined to 1.186 million. That’s still well above pre-pandemic levels but the lowest level since March. It also is the first weekly decline after two weeks of increases.

Continuing claims also declined, hitting their lowest level since April. About 16.1 million people are receiving continuing unemployment benefits.

For all four indexes reported below, anything above 50.0 indicates expansion and a reading below 50.0 indicates the sector is contracting. Despite the COVID-19 crisis, three of the indexes now are showing growth, while the fourth rose to 50.0 and is on a clear uptrend.

The ISM Manufacturing Index remained above 50.0 and improved in July. It was reported at 54.2, compared to 52.6 in June.

The PMI Manufacturing Index continues to lag a bit behind. But it now reflects growth, coming in at 50.9 for July. That compares to 49.8 in June.

The services sector continued to recover in July.

The ISM Non-Manufacturing Index was reported at 58.1 for July, compared to 57.1 in June.

The PMI Services Index reached 50.0 in July, compared to 47.9 in June.

Factory Orders increased again in June. Orders were up 6.2% for the month, compared to a 7.7% increase in May. Orders for motor vehicles were a major reason for the June increase.

Orders still are 10.1% lower than 12 months ago and below their pre-pandemic level in February.

Despite the high unemployment rate, personal income declined only 1.1% in June, according to the Personal Income and Outlays report. That compares to a 4.4% decline in May.

Thanks to the various stimulus measures, spending increased 5.7% in June. That’s down from the 8.5% increase from April to May.

Inflation remains low, according to the PCE Price Index. In June, the price index increased 0.4%, which compares to a 0.1% rise in May. The 12-month gain was 0.8%.

Excluding food and energy, the price index increased 0.2% in June (the same as in May) and 0.9% for the last 12 months.

Consumer Sentiment, as measured by the University of Michigan, declined slightly to 72.5 at the end of July. It was 73.2 in the first half of July.

The Chicago PMI finally is back above 50, indicating growth in the midwestern economy. The measure reported for July rebounded to 51.9, compared to 36.6 in June.

The ADP Employment Report has been very volatile during the pandemic and differed significantly from economists’ expectations and the government’s employment reports.

The original ADP report for June estimated 2.369 million private sector jobs were created during the month. This week, that number was revised much higher to 4.3 million new jobs in June.

But for July, ADP estimates only 167,000 new private sector jobs were created. Economists were expecting one million or more. Of the new jobs in July, all but 1,000 were from the services sector.

The number of jobs still is well below the recent peak, because ADP reported a loss of 19.7 million jobs in March and April.

The Markets

The S&P 500 rose 2.15% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 2.45%. The Russell 2000 increased 2.97%. The All-Country World Index (excluding U.S. stocks) lost 0.04%. Emerging market equities gained 1.13%.

Long-term treasuries rose 0.16% for the week. Investment-grade bonds increased 0.39%. Treasury Inflation-Protected Securities (TIPS) added 0.81%. High-yield bonds gained 0.57%.

In the currency arena, the U.S. dollar declined 0.59%.

Energy-based commodities increased 1.75%, while broader-based commodities rose 3.86%. Gold gained 3.40%.

Bob’s News & Updates

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