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The first week of August heralded the first unemployment report for initial claims below 1 million since March 21st. Labor costs for Q2 increased at an annual rate of 12.2%, bringing the increase over the trailing four quarters to 5.7%. Many other related number are all over the map, mostly due to the dislocation in work through the economy in the 2nd quarter. Personal income got a huge boost in April due to the stimulus, before leveling off over the next few months.
The reliability of labor and related metrics continues to be questionable though this pandemic, as long term unemployment is forecasted to remain high. Still, any good news is helpful, with July’s unemployment down to 10.2%, but still more than twice as high as last July’s number.
China and other parts of Asia experienced huge flooding, including floods that threatened not only the Three Gorges Dam, but also Wuhan, which lies downstream. While many people were displaced, the worst case scenario was avoided when rains subsided, leaving the manufacturing center of the world’s economy still intact. Still, Chinese factory activity growth continues.
Air travel continues to be down, but is actually up to about 1/4 of last year’s rate, a huge improvement since May. Hotel occupancy rates are still historically low, now running at about half of normal rates.
Needless to say, the US stock market has been on a tear. Specifically, the biggest 5 tech companies (known together as FAAMG), now account for roughly 1/4 of the entire S&P 500 index. In fact, if you remove those 5 companies from the Wilshire 5,000 (roughly the entire stock market), the market has been flat since the beginning of 2017, while those companies have gone up nearly 200%.
Those impressive tech gains are probably one of the factors that caused Exxon to be removed from the Dow Jones Industrial Average after being in the index for 92 years. Exxon’s replacement is Salesforce, a tech company.
Warren Buffet’s favorite indicator ( GDP divided by market capitalization of the US markets ) has exceeded 100% again, suggesting markets are frothy. The ratio currently is about 1.6x, the highest rate since the dot-com era. Blackstone’s Byron Wien is one of many analysts who think the market is fully priced, while Ed Yardeni thinks the market will be driven by the Fed’s actions.
Months ago, we predicted a bumpy and inconsistent recovery. So far, things have generally looked good, mostly due to the daily news about the increasing stock market. But when we look at the biggest five companies (AAPL, AMZN, MSFT, GOOG, FB), they are now more than 20% of the entire US market cap.
This suggests not only that the covid economy highly favors these companies, but also that investors are having a tough time finding other places to invest their money. Disney, for instance, posted it’s first loss in 20 years, but is still priced at year-ago levels, and has no new Marvel or Star Wars movies to count on for revenue. This is clearly another sign of a bubble, especially when covid-related deaths remain stubbornly high.
Clearly, though, the covid economy favors tech companies. Tech stocks are expensive, but technology continues to drive gains in knowledge, from getting the first photorealistic look at Rome’s emperors, to the first photo of a multi-planet solar system outside our own.
Of course, technology also powers every Zoom meeting on the planet, but that has now become everyday – more so even than driving to the store for many people. Working in an office and business travel looks to be permanently depressed, so much so, that one housing builder is using home offices to drive its marketing efforts.
Clearly technology’s role in our life is changing (or maybe technology is changing our role in life). Either way, it’s importance has grown versus pre-covid. But rapid technology change causes social issues. It does today just as it did in 19th century England. When mixed with a pandemic and global economic shutdown, we should expect economic disruptions and dislocations to be larger still. The wealthy of the world are increasing their cash. Perhaps they know something?
There are some suggesting that we may have a double-dip recession, with the second down leg not happening until 2021. Given that the President’s recent executive order delaying evictions just took effect, the number of households that may be evicted in the coming months remains stubbornly high, with some estimates as high as 11 million, and the number at risk closer to 17 million. Clearly, anything even remotely close to this number would be catastrophic to the economy, and we expect the government to continue to step in to keep this number much lower.
But Covid is not the only factor impacting the world economy. Trade spats between the world’s largest economies continue, and probably will continue for the foreseeable future. Huawei and TikTok may be only the first casualties of a growing trade war. This seems to be a bipartisan concern in the US, suggesting the trade war is more likely to get worse before it gets better. One analysis expects the US & European supply chain relocations out of China to cost a trillion dollars over the next 5 years. Despite this high number, the report concluded that the change would ultimately be beneficial to companies.
After a summertime of watching Covid impact the economy, we see cultural changes coming too. Stanford University cancelled it’s in-person reopening, while both the Big-10 and PAC-12 cancelled the fall football season (although many aren’t happy about this). This impacts not just their revenues, but those of the surrounding cities, TV stations, and cable sports networks. Like ripples in water from a rock, the ripples of a lack of in-person college education this fall will be significant. Deferment my be only the beginning, and predictions about lasting impacts to colleges are already being made.
With the election now less than 10 weeks away, it will start to dominate the news cycle as politicians angle to impact the market for their victory. Markets are historically tough to predict, and just because millions of people are out of work, or late on rent, or bankruptcies are rising doesn’t mean the sky is falling. Economies are complicated, with politics plus pandemics making them only more so. Our key factors we’ll be watching for the remainder of the year are Covid, government stimulus, Federal Reserve actions, and trade impacts. All of this leads to unlikely events becoming more likely, and an unpredictable autumn. Somehow in this strange world of 2020, even record breaking hurricanes can’t put a damper on the human spirit.
With miles driven down more than 10% this year versus last, your car is aging slower than it used to. The operational costs of a slightly-more used vehicle presents a great opportunity to save money.
If you are thinking about replacing your car, now is a great time to save that money and wait for next year. Unless you really need to replace it, your current car is probably seeing fewer days out of the driveway, and fewer miles on the road.
Take advantage of this situation to build up your new car fund by postponing that purchase for one more year.
Finally, a public service message: Many of our clients, friends, and families are part of at-risk households. For their sake, please wear a mask.
Words of Wisdom
“For here now is the age of iron. Never by daytime will there be an end to hard work and pain, nor in the night to weariness, when the gods will send anxieties to trouble us.”
The Works and Days