“This is the weirdest recession we have ever seen.”
I heard these words this morning in an interview. I have to admit, I agree.
There is a complete and total disconnect between the US Stock Market and the US Economy. The Stock Market is not the Economy and the Economy is not the Stock Market. There certainly is overlap, but they are quite different entities. Cost cuts are perceived to be good for the Stock Market. Not so for the Economy. The Economy is represented by the American Consumer and Small Business. The Stock Market is, in large part, the Tech Titans.
The S&P closed the week with slight declines after having previously gone up every day in August. It bumped up against its all-time high this week. The current valuation of the S&P is the highest ever. This level has only been reached one other time in modern times: The year 2000. The Tech-heavy NAS has led the charge with a historic run above 11K. This is the quickest Market recovery in a half century. What normally takes nearly 3 years has occurred in only 5 months. That is fast. It’s really, really fast.
I wrote it last week. I’m writing it again: Nothing has been able to keep the Stock Market down; Not a global pandemic. Not a global recession. Not national civil unrest. Not increased tensions with China. Not even the threat of higher tax rates needed to ultimately pay down the mountain of debt created to combat the crisis. It’s actually quite remarkable. Fundamentals have not been driving the tape. The broad based fundamentals just aren’t that strong. Strength is very narrow, largely found in the Technology arena. When they say the Market climbs a wall of worry; Wow. That is certainly the case. But they also say the Market hates uncertainty. There’s a whole bunch of uncertainty right now. Uncertainty is everywhere.
The Senate formally adjourned for the rest of August, making it less likely that another coronavirus relief package will be struck before lawmakers return in September after Labor Day. Go big or go home? They apparently chose to go home. I know, it seems so unbelievable. They really did. What’s significant is this essentially formed a triangle between the White House, Senate Republicans and the Democrats. It’s a fairly unique situation. The Democrats and the President want to spend more. Senate Republicans have balked at anything over $1 Trillion. They’re all pointing fingers. That part is very believable.
America’s AAA credit rating was recently put on watch for possible downgrade. Uncle Sam’s financial position was challenged prior to Covid. The mountain of debt created in response has made it much more precarious.
There are no plans for another round of stimulus talks over the near term with Republicans and Democrats still far apart over the size and scope of a package. According to Bloomberg, additional state and local government funding may now be the biggest stumbling block. Americans counting on the additional aid now have to find alternatives. It’s really surprising that the Market hasn’t declined more. Under normal circumstances, it would be throwing a total tantrum. Congress likely would’ve responded quicker had the Market forced their hand. But we know there is nothing normal about 2020. The stubbornly resilient Stock Market sure is something.
With fiscal stimulus fading, we continue to keep a close eye on the high frequency data. The National Multifamily Housing Council’s Rent Payment Tracker found 79.3% of apartment households made a full or partial rent payment the first week of August. Another way to look at it, over 20% of renters missed the August rent.
All the while, signs keep showing that the Economy is stalling. Retail sales grew 1.2% in July. The good news is it was the 3rd straight monthly increase. The bad news, it came in below the 2.3% estimate. It is yet another indicator that the rebound in America is slowing. While weekly jobless claims fell below 1 Million for the first time since March, hiring at small businesses, shifts worked across a broad range of industries, credit card spending and gasoline demand remained flat and stuck well below year-ago levels.
This is a pivotal period right now. With roughly 80 days until the election, there is a bit of an economic stall with elevated virus cases and a slowing of the re-opening. Back-to-school presents challenges too. The campaign trail is virtually heating up. The Democratic convention takes place next week followed by the Republicans’ the week after. Virtual or not, the political parties are near. Get ready for it.
Joe Biden selected Kamala Harris as his running mate this week. This drew energetic responses on both sides, positive and negative. That’s no surprise considering the political divide. Something important was the fact that stocks rallied, led by Financials. Perhaps the Market was relieved by her more moderate track record. Some say it guarantees Elizabeth Warren will never occupy the White House now. Perhaps there’s something to that. Warren and the Market don’t really enjoy each other’s company.
The Market still expects a deal to get done. It seems to be a matter of when, not if. That said, the when just got pushed out to after Labor Day. Our sources believe the likelihood is a ~$1.5-$2 Trillion package ultimately gets passed, given the widely understood fiscal cliff and signs of the slowing recovery momentum. However, the lack of Market weakness to some of the negative headlines over last couple of days has likely made it less urgent. Failing to reach a deal would not be good.
Earnings Season is coming to a close. Q2 was stellar for the Tech Titans. Not so for the US Economy. Congress and the Fed pumped $5 Trillion into the financial system. That exceeded US Gross Domestic Product. This is the first time in American history that has happened. Simultaneously, the US Stock Market increased by $7 Trillion. At $32 Trillion, the total US Stock Market Capitalization is now 2X the US Economy. That is the highest ever, outpacing the previous record of 1.87X in the year 2000, just before the dot-com bubble burst. Taking it further, the US Stock Market is now worth half of Global GDP. Today’s Stock Market is the most valuable in our lifetime.
We are so impressed with this recovery rally. Quite frankly, we cannot believe how much it has recovered from the March lows. It’s happened so fast despite the ever-challenging fundamentals. Things looked really bleak back in the Spring. Sure, the Fed has played a big role in driving asset prices higher. But there’s a level of speculation underneath the bids in stocks which are disconnected from reality. We find it generally safer to operate in reality. We anticipate its return in the days and weeks ahead. We are always on the lookout.
Have a nice weekend. We’ll be back, dark and early on Monday.