Fed Maintains Stimulus Commitment as Economic Outlook Dims and Coronavirus Deaths Surpass 150,000

Key takeaways

• As of July 31, 2020, there were more than 4.5 million cases and over 152,000 deaths in the United States. Worldwide, there have been more than 17.3 million cases and over 674,000 deaths. (Johns Hopkins University)
• Republicans are set to release their proposal for the next coronavirus relief bill on Monday, August 3, 2020, with millions of Americans on the verge of losing expanded unemployment benefits.
• U.S. GDP contracted by a record -32.9% in the second quarter. Federal stimulus and unemployment payments have been a key support for consumer spending, which in turn has been a key driver of the U.S. economy.
• Continuing unemployment claims climbed to 17.06 million, up from 16.197 million the week prior. The rise in continuing claims was concentrated in California and Texas, both hotspots for a second wave of virus infections. (Cetera Investment Management)
• Consumer confidence weakened in July as the Conference Board’s index came in at 92.6, surprising to the downside. Survey estimates predicted confidence to be 95.0, so the estimates were off by 2.4. (Wall Street Journal)
• Gold prices reached an all-time high of over $1,960 per ounce on Thursday, July 30, 2020. The previous all-time high was set in 2011 at $1,921 per ounce.

Stocks slump on GDP nosedive

Source: MarketWatch

Trending: Worst month for the U.S. dollar in nearly a decade

The dollar closed out its worst month since April 2011 as a rise in coronavirus infections across the U.S. threatens to damp the economic recovery and keep low interest rates in place for longer.

Figure 1: A Weakening Dollar

Source: FactSet

The ICE U.S. Dollar Index, which measures the dollar against a basket of other currencies, weakened 0.8% to its lowest level since June 2018, according to FactSet.

Investors have sold the dollar and bought currencies of countries with lower infection levels in recent weeks. That erased about 3.8% of the currency’s value in July, putting it on track for its worst one-month performance in almost a decade.

The recent surge in cases in parts of the U.S. has prompted local authorities to halt or rewind plans to let business activity resume, raising doubts about the prospects for the economy. California, Texas and Florida, which are among the hardest-hit states, together account for more than 25% of U.S. gross domestic product (GDP).(Wall Street Journal, FactSet).

1. Market update

• This week, the S&P 500 was +1.73%, the Nasdaq was +3.69%, and the Dow Jones was -0.15%.
• Year-to-date, the S&P 500 is in positive territory. As of Friday, June 31, 2020, the S&P 500 is +1.25%. The Nasdaq is +19.76% and the Dow Jones is -7.39% since the beginning of the year.
• “Big tech” demolished earnings estimates on Thursday, July 30, 2020. All four benefit from their products and services which can be used from home, and increasingly so in the absence of real-world shopping and leisure competition. (MarketWatch)
  • Apple reported $2.58 per share versus an estimate of $2.04 per share. Apple also announced a 4-for-1 stock split as shares surged after hours.
  • Amazon reported $10.30 per share versus an estimate of $1.46 per share. Amazon also reported revenue of a whopping $88.9 billion.
  • Facebook reported $1.80 per share versus an estimate of $1.39 per share. Facebook nearly doubled its profit year-over-year and beat expectations on monthly active users.
  • Alphabet reported $10.13 per share versus an estimate of $8.34 per share. However, its year-over-year revenue fell, and shares of Alphabet were roughly flat after the earnings report.
• The forward P/E ratio is 22.02x as of July 30, 2020. It has not been this high since the tech bubble in 2000 and is well above the 25-year average of 16.4x. (JP Morgan Asset Management)
• Goldman Sachs forecasts the S&P 500 will end 2020 at 3,000 and be at 3,100 by the end of 2021, roughly about -7% its current price. (Goldman Sachs)
• According to Goldman Sachs, single stock options trading volumes are bigger than share volumes for the first time ever. Option volumes as a percentage of shares currently stands at around 115%. (Goldman Sachs, Wall Street Journal)
• Volatility increases 30% from July through November during election years. With Election Day just three months away, it will be interesting to see if volatility picks up in the coming weeks. (FactSet, Bloomberg)
• Gold prices reached an all-time high of over $1,960 per ounce on Thursday, July 30, 2020. The previous all-time high was set in 2011 at $1,921 per ounce.

2. Covid-19 summary

Figure 2: Daily New Covid-19 Cases in the U.S. as of July 31

Source: worldometers&v=y1vwkdxz3culsbskpgf1hb31

• As of July 31, 2020, there were more than 4.5 million cases and over 152,000 deaths in the United States. Worldwide, there have been more than 17.3 million cases and over 674,000 deaths. (Johns Hopkins University)
• New cases in the U.S. came in at just under 68,000 on Thursday, July 30, 2020. The seven-day average of new daily cases fell -3% week-over-week, down from 6.2% the previous week. Tragically, the U.S. death count surpassed 150,000 following new daily highs in California, Florida and Texas. (Johns Hopkins University, LPL Financial)
• Just one (1) state is on track to contain Covid-19. Thirteen (13) states are experiencing an active or imminent outbreak, and twenty-seven (27) states are at risk of an outbreak. (Covid Act Now)

Figure 3: State of the States as of July 31, 2020

Source: Covid Act Now

3. Down to the wire on stimulus

• Millions of Americans may be stranded without unemployment benefits.
• Republicans are set to release their proposal for the next coronavirus relief bill on Monday, August 3, 2020, with millions of Americans on the verge of losing expanded unemployment benefits. (Wall Street Journal)
• The Republican bill, estimated to cost about $1 trillion, will include another round of direct $1,200 payments to many Americans, $100 billion in aid to schools and universities and additional money for coronavirus testing, according to administration officials. (Wall Street Journal)
• State and local governments would get no additional aid, though the Republican proposal will grant them more flexibility in using existing federal assistance. Democrats, by contrast, have allotted nearly $1 trillion to state and local governments to fill budget gaps opened by loss of revenue and growing expenses because of the recession. Lawmakers now have little time before the $600 weekly supplement to jobless benefits ends. (Wall Street Journal)

4. Unemployment

• Initial claims for jobless benefits rose to 1.434 million last week, up from 1.416 the week prior. This was the 19^th week in a row where initial jobless claims were above 1 million.
• Continuing unemployment claims climbed to 17.06 million, up from 16.197 million the week prior. This was the second week in a row where claims rose. The rise in continuing claims was concentrated in California and Texas, both hotspots for a second wave of virus infections. (Cetera Investment Management)
• The increased number of people receiving jobless benefits, known as continuing claims, had been declining in recent weeks before increasing in the past two weeks. Jim O’Sullivan, a strategist at TD Securities, said the reversal “could feed into fears that the economy” is weakening again. (Wall Street Journal)
• Currently, more than 30 million workers are collecting jobless benefits. (CNBC)

5. What is going on in the economy right now?

• U.S. GDP contracted by a record -32.9% in the second quarter. Federal stimulus and unemployment payments have been a key support for consumer spending, which in turn has been a key driver of the U.S. economy.
• The non-partisan CBO estimates that federal debt will grow to 101% of GDP by end of fiscal year 2020, and to 108% by the end of 2021. Economic growth stalled in countries such as Italy and Japan when their debt-to-GDP ratio exceeded 100%. (CBO, Piper Sandler, Wall Street Journal)
• Consumer confidence weakened in July as the Conference Board’s Index came in at 92.6, surprising to the downside. Survey estimates predicted confidence to be 95.0, so the estimates were off by 2.4. (Wall Street Journal)
• Total debit and credit-card spending by all consumers decreased by -6.4% in July 2020 compared with January 2020. (Wall Street Journal)
• U.S. Markit manufacturing PMI continues to show expansion as it was 51.3 last week. However, the services PMI is still in contraction at 49.6. European business activity continues to outpace the U.S. (Wall Street Journal)
• The U.S. trade deficit in goods unexpectedly narrowed in June for the first time in four months, shrinking to $70.6B from $75.3B. U.S. exports climbed by a record amount (+13.9%) to $102.6B, while imports rose 4.8% to $173.2B. The data is a positive signal that global commerce is beginning to stabilize. (Cetera Investment Management)
• Pending home sales increased by +16.6% in June, topping forecasts for a smaller +15% increase. This increase comes after a +44.3% surge in May. Pending home sales are now up +6.3% year-over-year, up from -5.1% year-over-year the month prior. (Cetera Investment Management)
• Mortgage applications activity slowed by -0.8% last week after climbing +4.1% the week prior. New purchase activity declined -1.5% and refinance-related activity slowed -0.4%. Second-wave fears of the virus are keeping would-be buyers at bay even as mortgage rates remain near record-lows. (Cetera Investment Management)
• Eurozone GDP shrunk at its fastest rate in history, losing -12.1% in Q2. Europe’s largest economy, Germany, suffered a record economic contraction in Q2 as its GDP fell -10.1%. (Wall Street Journal)

6. Over 40% of U.S. renters now at risk of eviction

States across the country are battling with renters facing a rental shortfall, and perhaps a potential eviction. The figure below shows survey data as of July 15, 2020.

Figure 4: Eviction Risk

Source: Statista

Many renter households are bound to face evictions in the months to come. Numerous central states have more than half of their renter households under pressure.

Does this point to a rockier economic recovery than once anticipated? (Wall Street Journal)

7. JPMorgan Chase: ‘European equities could provide a logical antidote’ to investors who are worried about a slowing in the U.S. recovery

• On July 28, 2020, Dr. David Kelly of JPMorgan noted that “Europe has had significant success in taming the spread of the coronavirus in recent months and this is enabling the continent to continue with a phased reopening of its economy.”
• Last week, European Union leaders agreed to a €750 billion coronavirus relief fund, financed by E.U. institutions themselves and directing resources to the poorest member states. While this move was clearly triggered by the extraordinary circumstances of the pandemic, “it established a crucial principle that the European Union was willing to provide some fiscal aid to nations in an emergency,” said Dr. Kelly.
• “The lack of this fiscal support was, in large part, responsible for the European debt crisis and this new move towards fiscal coordination, albeit with significant conditions, should reduce the riskiness of the euro and, by extension, euro-denominated assets going forward.”
• European equities carry lower P/E ratios than their U.S. counterparts and Europe will likely have less need to raise taxes in the aftermath of the pandemic than the U.S.
• Moreover, Europe runs a “significant trade surplus,” in sharp contrast to the U.S., and “a rise in the euro could amplify equity returns for U.S. investors,” states Dr. Kelly. (Dr. David Kelly, JPMorgan Asset Management, Financial Advisor Magazine)

8. Bullish thinking

• LPL Financial believes that gold could very well remain strong. In fact, 2020 is the first year since 1979 to have both gold and the S&P 500 make new highs during the calendar year. What happened the last time? Gold added another 17% and the S&P 500 was up 26% in 1980. (LPL Financial)
• Joyce Chang, head of JPMorgan research, believes investors should look to emerging markets. Emerging markets seems to offer the best value proposition at this current juncture. And it is not just the stocks that look good—emerging market bonds offer a nice spread over treasuries. (Barron’s)

9. Bearish thinking

• Chang also believes the traditional 60/40 equity/bond asset allocation will return just +3.5% in the coming years, down from double digit returns of the past half century. (Barron’s)
• Deutsche Bank expects consumer spending to take more than two years to return to pre-pandemic levels. (Deutsche Bank Research)
• According to LPL Financial, several high-frequency data points point to a pause in the U.S. recovery. “Most of the real-time data we follow reflects a pause in the recovery following the latest Covid-19 outbreak,” explained LPL Financial Equity Strategist Jeffrey Buchbinder. “We expect the stock market to follow the economic data and take a breather after a 45% rally in just four months.” (LPL Financial)
• Goldman Sachs estimates a -7.8% downside in total returns for the S&P 500 in the next three months to 3,000, and -1.7% over the next 12 months to about 3,150. (Goldman Sachs)