Last week, equities were positive as value names led the way. The S&P 500 index was up 0.69% while the S&P 500 Value index was up 0.91% and the S&P 500 Growth index returned 0.55%. Top performers in the S&P 500 index were cruise providers Royal Caribbean Cruises LTD and Norwegian Cruise Line Holdings along with gaming/hotel titans Wynn Resorts LTD and MGM Resorts International. These names benefitted from the 7-day average positive COVID19 tests falling to 54,503 on Friday, down from 69,190 high on July 25th a ~22% reduction. Earnings season wound down as only 13 names in the S&P 500 announced quarterly results. Among those announcing quarterly results was Simon Property Group one of the largest mall REIT’s. Simon announced earnings that beat analyst estimates along with positive guidance that pushed the stock up 9.6% last week. Simon also finalized plans, along with partners, to buy retail brands Brooks Brothers and Lucky Brand. Further, the Wall Street Journal reported a possible deal where Simon and Brookfield Property Partners are negotiating to purchase J.C. Penny’s retail operations out of bankruptcy. Royal Caribbean announced poor quarterly results but managed to rally 16% after surprising with strong 2021 bookings that buoyed the chances of a return to profitability by next year. They also laid out a sizeable liquidity cushion that should keep the company solvent for 14-16 months even with little improvement in demand.
The biggest risk remains that policies which work are stopped too early. From Dec 2019, there are 4.9 million more individuals out of the U.S. labor force in July 2020. This is reflected in a reduced labor force participation rate (61.4% in July), and hints at shadow unemployment. The Job Openings and Labor Turnover Survey (JOLTS) showed an increase in U.S. job openings in June, rising m/m to 5.9 million. But the level chart illustrates that there is still a long distance to go to witness a full recovery. This matters because long-term unemployment is rising in the U.S.
High unemployment has provided a substantial disinflationary shock to the global economy in 2020. Business outlook readings have recovered in some regions (eg, the German ZEW), but remained lackluster in others (eg, the U.S. small business survey done by NFIB).
Fortunately, last week we saw evidence that inflation expectations do not yet appear to have become de-anchored to the downside, which was a fear of central banks. Aggressive monetary & fiscal responses have helped (ie, policy is working). The U.S. CPI rose +0.6% m/m, with the core (ex food & energy) component also up +0.6%. Apparel and transportation, which had been hard hit in the lockdown, saw rebounds. The bounce leaves the CPI up 1.0% y/y and the core at 1.6% y/y. On top of last week’s U.S. PPI reading (+0.6% m/m in July) as well as other price data (eg, China’s PPI), there’s additional evidence that disinflation pressures are easing some. Reflation is likely before any inflation problem (ie, what we’re seeing now is “good inflation”).
It does appear that the (temporary?) end of expanded jobless benefits may be spurring individuals to look for work. U.S. initial jobless claims continued to decline as expanded federal benefits have ended, falling -228,000 w/w to 963,000 in the Aug 8th week. Continuing claims also declined notably to 15.5 million in the Aug 1st week, providing evidence that the labor market is healing (though there is still a long way to go, as continuing claims a year ago were 1.7 million). Near-term weakness could occur if there are additional layoffs as a seasonal activity associated with schools re-opening is skipped, but there’s been progress.
This is occurring as the world continues to learn to live with COVID-19. Some countries employed forced-isolation techniques: “The failure to effectively manage contagious people with mild or no symptoms is a driving factor behind some of the world’s worst resurgences. But lessons from Italy, South Korea and others that have successfully contained large-scale outbreaks show that there’s a tried-and-tested approach to cutting off transmission: move them out of their homes into centralized facilities while they get over their infections” (Bloomberg).
Forced isolation and contact-tracing still may strike many in the U.S. as odd, so there’s been a push for frequent, cheap testing. Professional sports leagues have helped boost this approach. There’s academic support as well.
There also remains the upside-risk case of a successful vaccine/drug.
Bottom line: the global economy is continuing to heal, but in an uneven fashion based on some of the recent numbers. Getting services back to pre-virus levels remains a challenge until there is a medical solution (vaccine/drug/test) to the medical problem (virus). In the meantime, all eyes remain on D.C. for a resolution on the fiscal stimulus situation, to create a longer economic bridge (likely at least $1 trillion more).
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments
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