COVID-19 Market Update: What Does Travel Data and Consumer Spending Tell Us?
Most markets advanced during the week with the S&P 500 closing just below the February high. The TSX is 8% off the February high, despite slowly improving economic data. Value stocks once again showed improvement over growth stocks, giving hopes to the much-maligned underperforming strategy. Industrials provided leadership bolstered by the strong performance of FedEx and United Parcel Service.
Over the last several weeks, market analysts have debated the reason for the market disconnect relative to market fundamentals. This week was no exception with little consensus agreement in why markets continue to drift higher. The one constant is the Fed’s low-interest-rate policy, which is expected to last for many months until the recovery gains momentum and unemployment returns to an acceptable level.
Coronavirus cases, for the moment, are on the rise in several states, yet generally overall are on the decline. However, the death rate hit a three-month high on August 12. The Russian announcement of a coronavirus vaccine and plans to inoculate starting late this fall fell flat when it was revealed that “western” extensive testing was skipped. People are becoming comfortable with the constant barrage of COVID news and the likelihood that the virus may be here to stay for quite some time. Protesting in several countries against mask requirements and an increase in airline ridership (with the largest reported single-day ridership since March this past Sunday) suggest a segment of the population becoming comfortable with the virus. The Swedish and Danish experience with coronavirus is gaining more attention and causing many to question the efficacy of European and North American decision-makers handling of the crisis.
Economic news for the week was given a boost from the US first-time initial jobless claims dropping below one million for the first time since March. Impressive as it may seem, there are still one million new claims for unemployment. Retail sales came in less than expected at 1.2% versus consensus 1.8%; however, retail sales ex-auto came in at 1.9% versus 1.3%. The University of Michigan’s measure of consumer sentiment surprisingly came in higher for August after the July drop. The Consumer Price Index (CPI) for July astonished with the largest headline and core (.6%) one-month jump since January 1991. With Central banks flooding the system with liquidity, many analysts expect inflationary pressure. The 10-year US Treasury witnessed an increase in yield to over .71% from an earlier .56%. In Canada, housing starts and manufacturing sales came in better than consensus forecasts, and bonds, like in the US, witnessed yields rising to two-month highs.
News that the US Congress failed to pass a stimulus package extending the unemployment benefits, while disappointing, could weigh heavily on future consumer spending data. Also, the Payroll Protection Program, which expired on August 8th will pressure employers who relied on the loans to meet payrolls. The result could force new layoffs in the coming weeks. Both Houses of Congress are not expected to return to Washington until September 8 for the Senate and September 14 for the House.
As the summer doldrums pass, we expect increasing volatility with the coming US elections and more economic data supporting or contradicting expectations of economic activity returning to normal.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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