Bob’s Journal for 9/10/20

Some Notable Events That Grabbed My Attention This Week

Questions arose in the last week about the foundation and sustainability of the rise in technology stock prices.

Since the market low in March, I’ve periodically documented how technology stocks soared ahead of the rest of the market. Technology’s share of the S&P 500 steadily increased because of the higher returns of the sector.

The run came to a halt in the last week. As of Tuesday’s market close, the Nasdaq 100 declined 10.89% over the last three trading days. There was a gain on Wednesday.

The recent surge was so strong that, even after the decline, the Nasdaq 100 still was above its 50-day moving average and well above its 200-day moving average.

Technology stocks no doubt were due for a halt in their steady upward climb. The real question is whether the stocks have peaked, or the correction was a pause in the upward move.

The probable catalyst for the correction was a Sept. 4 article in The Wall Street Journal.

The article said that SoftBank Group, a Japan-based investment firm, bet heavily on technology stocks and probably moved the market. SoftBank apparently not only bought a lot of technology stocks but also bought options on tech stocks. The Journal estimates that the options amounted to about $50 billion worth of tech stocks.

The Journal also said that options activity on technology stocks in general has been “robust” in recent months. So, investors other than SoftBank apparently have been active in this market.

Traders interviewed for the article said the options activity can push stock prices higher. They point to several tech stocks, such as Salesforce.com and Zoom, that had significant price surges after reporting earnings.

Options trades can move stock prices because the dealers that sell options back up and hedge their exposures by buying stocks that back the options. When a lot of options are purchased, the dealers buy a lot of stock.

The potential problem for investors is the market can move in the opposite direction when the options investors unwind their trades or simply take a break from the market. It is another reason to be diversified and balanced in this market.

Mortgage Refinancing Surges

One sector of this uneven economy that’s doing well is the housing market.

An indication of that strength is the mortgage market. Lenders issued more home loans in the second quarter of 2020 than at any time since 2000, when data-tracking firm Black Knight began compiling the information.

About $1.1 trillion in home loans were issued in the second quarter. That compares to $2.5 trillion for all of 2019.

Mortgages issued to homeowners who were refinancing existing mortgages increased 200% from 12 months earlier. The refinancings fueled much of the surge in mortgage issuance.

But mortgages to buy homes declined 8% during the quarter. That decline largely was because stay-at-home orders in many areas did not allow buyers to visit homes for sale. Recent data show there has been a surge in home buying since the end of the second quarter. That likely will be reflected in the next mortgage report.

The refinancing surge should help the economy a little. When homeowners lower their payments, they have money to increase savings or spending on other things. But the increase is unlikely to be powerful.

Purchases of homes, on the other hand, tend to have a multiplier effect. Home buyers often buy additional furnishings for the home that help a range of businesses.

Unlike many past periods, housing isn’t likely to lead the economy this time. But it is adding to growth and will continue to do that as long as interest rates are low.

Used Car Prices Surge

You’re unlikely to find a deal on a used car anytime soon.

Used car prices increased 16% in July alone, according to The New York Times. Several factors are at work.

When the economy is weak, many people decide to save money by purchasing used cars instead of new cars. But other factors are stimulating used car sales this time.

Some people who used to commute using mass transportation are buying commuter cars to avoid buses, trains and subways.

Also, the pandemic caused most auto manufacturers to close their factories for a couple of months. That created a limited supply of new cars, so people looked for used cars.

Despite the weak economy, car manufacturers continue to increase their prices. That’s also causing potential buyers to look at used cars instead of new cars.

Interestingly, an analysis by iSeeCars reported in The Denver Post found that the 10 models with the highest price increases nationally were all luxury or sports cars, not the practical, affordable cars we’d expect consumers to look for during a recession.

Should You Convert Your IRA?

There are a lot of good reasons to consider converting a traditional IRA into a Roth IRA in 2020. I’ve recounted these reasons in Retirement Watch several times this year.

But, as I’ve said, a conversion isn’t the best strategy for everyone. There are a number of factors you need to consider and balance when making a decision.

To help you make the decision, I developed an IRA Conversion Calculator that’s now available to my readers.

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The Data

The number of new unemployment claims was unchanged at 884,000 in the latest week. Last week’s number was revised higher to 884,000 from an initially reported 881,000.

Continuing unemployment claims increased by 93,000 to 13.385 million.

Claims made under the Pandemic Unemployment Assistance program, which pays compensation to those who don’t qualify for regular unemployment compensation, increased to 838,916. That’s an increase of more than 90,000.

The number of people receiving all types of unemployment assistance increased to 29.6 million.

The Small Business Optimism Index from the National Federation of Independent Business (NFIB) increased to 100.2 in August compared to 98.8 in July. That still is well below the 110 level the index reached before the pandemic.

Eight of the 10 components of the index increased. Expectations for the Economy to Improve and Expectations for Retail Sales to be Higher were the two components that declined.

The expectations for higher retail sales is at the low end of the survey’s history and is the lowest level since October 2016.

Inflation at the whole sale level declined a little in August. The Producer Price Index (PPI) increased 0.3% for the month, compared to a 0.6% increase in July. For the last 12 months, the PPI is down 0.2%.

Excluding food and energy, the PPI increased 0.4% in August and 0.6% over the past 12 months.

Last Friday’s Employment Situation reports showed 1.37 million new jobs were created in August. That was better than the forecasts and much better than the ADP report of private sector job creation. The unemployment rate declined to 8.4% from 10.2%.

Government led the job creation, accounting for 25% of the increase. A large portion of those jobs were related to the census. There also were strong increases in retail, education and health services.

There still are 11.5 million fewer people employed than before the pandemic. Average hourly earnings increased 4.7% over 12 months and 0.4% for the month of August.

The JOLTS (Job Openings and Labor Turnover Survey) report for July showed a big rebound in the labor market. The JOLTS report is more detailed than the Employment Situation reports and is a month behind.

The number of job openings as a percentage of the labor force was near pre-pandemic levels in July, according to JOLTS, though it still was well below the peak levels in 2017-2018.

Layoff and discharge rates also were back near pre-pandemic levels. Not surprisingly, the hiring rate surged as businesses reopened.

The quits rate also is returning to near-normal levels. That indicates workers have enough confidence to quit their jobs and seek new ones.

The Markets

The S&P 500 declined 5.01% for the week ended with Wednesday’s close. The Dow Jones Industrial Average lost 3.90%. The Russell 2000 fell 3.99%. The All-Country World Index (excluding U.S. stocks) dropped 1.81%. Emerging market equities decreased 2.12%.

Long-term treasuries lost 1.28% for the week. Investment-grade bonds declined 1.12%. Treasury Inflation-Protected Securities (TIPS) fell 0.50%, while high-yield bonds dropped 0.67%.

In the currency arena, the U.S. dollar increased 0.56%.

Energy-based commodities lost 3.98%. Broader-based commodities fell 2.08% but gold gained 0.16%.

Bob’s News & Updates

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