The Price of What Lies Ahead

It was another eventful week. I could probably rubber stamp that line. There really haven’t been any uneventful in 2020. The Market continues to digest so many ongoing issues and developments with remarkable buoyancy. Stocks finished Friday ever-so-slightly higher, erasing morning losses. With a 6-day win streak in place, the S&P 500 has nearly erased all of the losses from its record high reached in February. The Tech-heavy Nasdaq closed above 11,000 for the first time ever on Thursday, but gave up some of the gains on Friday, still holding that milestone level. Tech was actually weak for the first time in a while. The Dow led Friday. The Dow is still deeper in the red on the year, but keeps whittling the losses away too.

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. This is a pivotal period right now, less than 100 days from the election and a seemingly economic stall with increased virus cases and a slowing of the re-opening. Back-to-school presents challenges too.

1.8 Million jobs were created in July. That was better than anticipated. It is still lower than prior months. 4.8 Million were created in June. The unemployment rate is 10%. It has only recovered about 40% of the jobs lost since the February employment peak. This also came with a significant amount of fiscal and monetary support.

We entered the week thinking the jobs number would not be weak enough to push Congress, on both party sides to a deal, and that appears to be the case. The US labor market continues to make progress. But it remains far from being fully healed.

Despite the drop in the unemployment rate, it’s still in double digits. In addition, the participation rate declined to 61.4%. Childcare is an important issue. Digging a little deeper, the participation rate for women aged 25 to 44 fell while it rose slightly for men in the same age group. Starting the Fall semester online puts tremendous pressure on families. More people are saying they can’t be at work due to child care issues or are on maternity/paternity leave. What’s worse, many Americans are ill-equipped for remote learning, lacking devices, network access with some children homeless. Besides, some parents have jobs that simply cannot be done from home. There is no easy answer here. The virus has completely exposed so many vulnerabilities of our society.

There has been little to no progress on a Congressional deal to provide more financial support to combat the economic challenges of the coronavirus. A three-hour meeting Thursday night between White House officials and Democratic leaders yielded little progress on a relief package, bringing the talks to the brink of collapse. No progress was reported Friday. It’s unclear where this is headed since both sides are seemingly so far apart. The President has said many times he is willing to use an executive order to get things done. Politicians are politicking ahead of the very contested election, which is less than 3 months away.

The Market still expects a deal to get done. 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 the 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. Over 80% of the S&P 500 companies have reported for Q2. Expectations were really low. They’ve been better than expected. The beat rates have been really high, with 84% of companies exceeding earnings expectations. Corporate America continues to highlight sequential improvement from extreme low levels in April. Cost control has been a big driver of earnings upside though some companies. Results from the travel-related companies were unsurprisingly weak though comments about some recent improvement were well received. Beat and raise Qtrs from Tech has been the biggest theme and their stocks have kept flying to nosebleed valuation levels, which is where they remain today. Expectations have become quite high for 2021.

The Stock Market is not the Economy. The Economy is not the Stock Market. It’s a phrase that bears repeating. But at the same time, there is significant overlap between the two. The Stock Market has priced in a great deal of good. Are things going to be better than good? We shall see. What lies ahead remains a mystery. We have felt the Market has been ahead of itself for weeks now, reflecting a rosier picture than reality. The road to November continues to be bumpy.

Have a nice weekend. We’ll be back, dark and early on Monday.


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