Market Recap

Posted on July 31, 2020 by Gemmer Asset

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Weekly Recap


Something of a mixed week in the markets with growth/tech doing well while small and value underperformed. The major economic news obviously was the first take on second quarter GDP. As expected – it stunk!!


The size of the U.S. economy between March and June shrunk by -32.9% (blue line below) at an annualized rate. The change year-over-year was -9.5% (red line below).



This is one for the record books. Previous to this report the worst quarterly change in GDP was during the Great Recession when growth fell -8.4% in Q4 2008. The worst year-over-year change was -3.9% in Q2 2009 (chart below).



Not all the data in the GDP report was grim.  For example:


  • Consumer personal expenditures declined only -1.79% in goods but -14.65% in services. The difference between those two categories makes sense — roughly the same spending level on groceries but fewer haircuts and massages.


  • Food and beverages purchased for off-premise consumption was up nearly +6% year-over-year while spending on food services and accommodations was down nearly -40% year-over-year.


  • Spending on recreational goods soared (up +15.33% year-over-year), and spending on recreational services plummeted -54.13%. Think Peloton over gym memberships.


  • Commercial spending on computer hardware (+9.73%) and software (+6.13%) also increased year-over-year. Cloud computing and remote working anyone?


  • Annualized household disposable income was reported to be $4,382 higher than in the prior quarter, and the household savings rate was reported to be 25.7%, up 16.1pp from the prior quarter. These numbers come from an annualization of the Federal relief payments from the CARES act, but the outrageous savings rate seems to indicate that households were reluctant (or unable) to spend those funds.


What do the numbers look like for the third quarter?  We are only a month into it, but preliminary estimates have growth ranging between +11.9% (green dot below is the Atlanta Fed number) and +18% (consensus of economists).



Of course, it is the same case in Europe, with growth down quarter-over-quarter anywhere from roughly -10.1% (Germany) to -18.5% (Spain).



Monetary and Fiscal Policy are Still Key


Without question, the key behind the market recovery of the last few months has been hyper-stimulative monetary and fiscal policy.   On the monetary side, the Fed met this week and basically it is full steam ahead.  Key points from the meeting:


  • As expected they left rates unchanged at 0-0.25% and made no change to its forward guidance, stating that it expects “to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”


  • No shocker here, but they pointed out that “the path of the economy will depend significantly on the course of the virus.”


  • During the press conference Chairman Powell reiterated that the Fed isn’t even thinking about thinking about reigning in policy any time soon.


Things aren’t so clear on the fiscal side as Congress appears deadlocked for now on the next round of fiscal support.  At midnight tonight the $600 unemployment benefit expires.   Both sides of the isle agree more support is needed, but there is no consensus on what it should consist of.  As you can see below, the two sides are a long ways apart.



Greg Valliere laid our four possible scenarios on Thursday:




1. Fearing an angry voter backlash, negotiators work overtime and produce a deal by this weekend, which would allow unemployment benefits to continue. Chances: very unlikely.


2. The talks drag well into August, with Congress delaying its Aug. 7 recess and producing a $1.5 trillion bill that puts unemployment benefits on a downward sliding scale, gives some liability protection, aid to state and local governments, $1,200 checks to individuals, more money for small business, and aid for schools. Chances: still the best bet.


3. The talks break down, with no deal in August amid growing market concerns: Chances: can’t rule this out.


4. A short-term extension passes in the next 48 hours, continuing unemployment benefits (at a lower dollar amount) but not much else. No one likes this approach, because it would reduce pressure to get the rest of the deal done. Chances: Unlikely, but “kick the can” is always the easiest option in this town.


THIS IS WASHINGTON AT ITS WORST: It’s all about non-negotiable demands, cynical political calculations, and consulting the opinion polls. The big losers will be millions of Americans who face evictions and bankruptcies.”


We will have to see what happens this weekend.


Charts We Found Interesting


1. Case growth is starting to slow again.



2. As are hospitalization rates. This might bode well for a spending recovery in August or September per J.P. Morgan – “US virus severity (measured by the level of hospitalizations) has been closely linked to the US spending recovery. As soon as the former stopped falling, the latter stopped rising. If we’re on the cusp of a decline in hospitalizations, we would expect in-person credit/debit card spending to start improving again.”



3. Doctor visits for COVID in hotspot states are down significantly.



4. Here in Contra Costa new case growth has also slowed



5. People are starting to travel again, at least domestically. Hotel occupancy rates are up meaningfully.



6. In other news, the yield on the 10-year government bond hit multi-century lows this week. That bull market in bonds (falling yields) in the late 1700s must have been epic!!



7. Elections have typically been ‘about the economy, stupid.’ If this is still the case, the White House may change hands given surveys like this.



8. Is Apple’s market-cap headed towards $2 trillion? If the current trend holds it should get there in less than three more months.



9. Certain trends move so slowly that you really don’t notice on a month-to-month or quarter-to-quarter basis. But pretty soon more electricity will be produced by wind and solar than by coal.



Have a good weekend.



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