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The economy and stock market have been sending contradictory messages since mid-March, when the S&P 500 index started an upward climb during the height of multi-state lockdowns and uncertainty about the novel coronavirus. The mixed messages have only amplified since then, and you will see that as a theme in this week’s news summary below.
S&P 500 hits all-time high amid pandemic recession. This is the fifth time in history that the market hit an all-time high while the economy was still in a recession. Market breadth has been underwhelming, while the concentration of the largest five stocks remains a risk. (Liz Ann Sonders)
- The Dow Jones Industrial index finally broke even this week, erasing 2020 losses, thus breaking a record of its own. The Dow lags the S&P 500 because it doesn’t hold the tech stocks that have driven so much growth this year.
- Insiders believe the stock market is overvalued. 84% of Chief Financial Officers (CFOs) describe equities as overvalued, the second-highest reading ever recorded, as seen in the chart below. This result shows a disconnect between the financial markets and the wider economy. (Bloomberg)
Low rates are here to stay. The Federal Reserve announced this week that it may leave interest rates low if it believes the economy is running at full employment. This is a major departure from previous Fed policy, which historically involved strategically raising interest rates to control the pace of growth and inflation. (MarketWatch)
Mortgage applications hit a post-2008 high. Weekly applications for mortgages to buy a home reached the highest it has been since September 2008. Year-over-year growth of more than 27% in mortgages for purchases is extraordinary with unemployment above 10%. (Wall Street Journal, Mortgage Bankers Associations of America)
Easy money from low interest rates has led to an unbalanced recovery. (Wall Street Journal)
- At the individual level, those without jobs who have had their unemployment benefits cut will take little comfort from the fact that work-from-homers can now afford to buy a bigger house with an office.
- At the business level, creditworthy public companies able to issue bonds have access to super cheap money. Meanwhile, private firms’ access to needed loans is diminishing, as lending standards are tightening faster than they did in the 2008-09 recession.
Consumer confidence is moving backwards, a bad sign for the economy. This is one of several indicators showing the U.S. economy is weakening as we progress into the last four months of the year. (Consumer confidence survey)
- That consumer sentiment has fallen while the S&P 500 has risen for five straight months and by nearly 50%, with housing prices counting superb back-to-back months, suggests an increasing disconnect between markets and the economy.
The President’s payroll tax deferral is on hold without IRS guidance. Two weeks after President Trump's executive action delaying payroll taxes, the Treasury Department still has not given companies guidance on how to handle the order, leading to only 3 states providing supplemental employment benefits. (Bloomberg)
International trade news
China is less than halfway to trade deal targets. To satisfy the conditions of the phase one U.S.-China trade deal, China is expected to purchase at least $200 billion more in U.S. exports combined in 2020 and 2021. As of July, however, they are more than 50% behind the pace of expected purchases. The good news is that a deal still exists, so neither country is adding additional tariffs right now.
U.S. imports jump in August, especially from China. Total U.S. imports have risen in August after ten straight months of declines, with U.S. imports by sea growing by 7% year-over-year in the first 15 days of the month. (Axios, S&P Global)
Durable Goods orders exceeded all expectations, rising 11.2% in July. Orders for military aircraft and motor vehicles led the gains. However, non-defense capital goods excluding aircraft, considered a proxy for business spending plans, only increased 1.9% in July, compared to 4.3% in June. This suggests a rebound in business investment could be more gradual amid uncertainty about the course of Covid-19. (CNBC)
Historic drop in global trade due to pandemic: Global trade flows collapsed in the second quarter, falling by the most on record, as coronavirus lockdowns disrupted air and sea transport and slashed consumer demand. (Wall Street Journal) This is the largest drop in trade in twenty years.
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