Stocks continued to rise to record levels last week after a clearer path was laid out by the Federal Reserve. In a shift from previous statements, chairman Jerome Powell said the Fed would be more accommodative and let inflation and employment run at higher rates that will likely accompany lower interest rates. The statement came as unemployment benefits dropped, signaling the labor market is recovering. President Trump officially accepted the GOP nomination on Thursday. His speech at the White House made history, as the site was used for a political event after the President had canceled plans to deliver his speech first in North Carolina and then in Florida. Abbott Laboratories announced on Wednesday that the FDA had given it’s $5 rapid result COVID-19 test the go-ahead to manufacture. The White House later announced it would be buying 150 million tests after Abbott said its production would run at about a 50 million a month rate. Moderna Inc. also announced positive phase 1 trial results for its COVID vaccine. The vaccine produces consistently high levels of neutralizing antibodies in older adults. Moving to the corporate economy, MGM Resorts announced it will lay off 18,000 employees while Coca-Cola is offering buyouts to 4,000 of its employees. Looking ahead, investors will be looking at the market through both the Biden and Trump policy lenses. With the debates scheduled for September 29, October 15, and October 22, the two candidates have one month to streamline their messages to their respective bases.
The three major topics last week were 1) the churn under the surface of the economic data; 2) the Fed’s long-run strategy review; and 3) progress on medical efforts to combat COVID-19 (vaccines/drugs but also quick/cheap testing). The globe appears to be learning to live with the virus, and if the economy is able to run hot, the Fed appears willing to let it do so. The macroeconomy is firing unevenly, but a durable bottom inactivity (still supported by Federal income-replacement) is likely intact. It helped that there was some moderately positive news on trade between the U.S. & China last week as well.
The Infectious Disease Equity Market Volatility Tracker is a measure showing the impact of the virus on equity market volatility. After a spike early in 2020, it has continued to trend lower in recent months. Concerns about second-waves of infection have climbed in numerous countries. Yet, risk assets look to be factoring in this news less & less.
U.S. durable goods orders rose +11.2% m/m in July, with core cap goods orders ex aircraft up 1.9% and shipments up 2.4%. Mfg continues to support the recovery, and the boost from autos is an important swing factor.
U.S. personal income rose 0.4% m/m in July, and the story remained one of government transfer payments making up the difference for many consumers. Nominal consumer spending rose 1.9% m/m. The U.S. saving rate was 17.8% (ie, still very elevated). Restrained consumer sentiment readings in August (e.g., the U of Mich survey at 74.1, Conf Bd at 84.8) indicate the fragility remaining in the U.S. economy, though the trajectory is one of improvement.
Expanded U.S. unemployment benefits ended in July, though the economy appears to have had enough momentum to make it through August based on the weekly/daily data (jobless claims, travel stats, mobility numbers, etc). While business production has been impaired, the production of consumer goods is helping create a durable bottom in economic activity. Key issues remain in services, small businesses, and then commercial real estate that serves firms with stranded assets (leisure & hospitality, travel, retail).
Bottom line: A new lockdown as in March/April is not the base case. Recent academic research indicates this tool was too blunt. Still, we are moving past the “easy” part of the economic bounce. Human beings generally find nonlinear series less intuitive (e.g., explaining compound interest, the rice-and-chessboard fable, etc). COVID-19 involves non-linear spread, which is why it’s so important to have sustainable policies to keep the medical “R number” (the number of people an infected person infects) less than 1. Yet we are making progress: fewer concerts, large gatherings, carnivals, bars + behavioral changes like social distancing, masks in public & cleaning protocols. The prospect of frequent/fast/cheap testing is especially relevant in the U.S., where case isolation & contract tracing have been tough to execute.
Now confidence needs to improve. If large-ticket purchases are improving (e.g., homes, cars), that argues a subset of the population is willing to take some risk. True, the strength remains in purchases of things vs. services (where person-to-person contact is risky). It is also an unequal recovery. New U.S. stimulus will have to be a September story (at best). We continue to believe that the biggest risk is that we end economic policies that are working too early, as we wait for the medical solution (vaccine/drug/test) to the medical problem (virus). But through August the economy has proved resilient. We are staying tuned.
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark the performance of specific investments
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