By: Stash Graham
The stock market continued its rise during the month of July due to developments within the vaccine world. The decoupling of the stock market and economy has continued to push levels not seen since the dot-com bubble in 2001. Rent delinquencies, business closures, layoffs all continued to increase during the month of July. Gold pushed for new record highs here in the United States (breaking over $2,000 per ounce at one point during the month). We sent out an investment update on the iShares Gold Trust (Ticker: IAU) position digitally on July 24th to our clients whom we have email addresses and own the position. If you would like to be included in our email outreach, please forward your email address to us! For investors, whom we do not have emails and they own IAU we have enclosed a print copy of the investment update. We have been pleased by the higher move in Gold prices, and while we could see a short term pullback, we believe better days are in the future for Gold as long as we get support from the Federal Reserve on the monetary side and Capitol Hill on the fiscal side.
In the latest developments regarding COVID-19, President Trump’s recent shift on the Coronavirus has caused some concern. During a press conference in the third week of July, the President announced that he expected the spread of the virus to get worse before it gets better. This proclamation certainly goes against previous comments by leadership over the last couple of months that the virus containment was improving. How Governors navigate the rise in COVID-19 cases in their respective states will be important to watch as the benefits from the fiscal stimulus courtesy of Capitol Hill changes shape. As we mentioned a few times, the fourth stimulus package will be the next big catalyst on which way the markets go. The market is skewed to the downside as failure to reach a fourth stimulus deal will be punished a lot more than a successful deal. This is what makes the current environment very difficult. House Democrats, Senate Republicans, and the White House need to complete their negotiations on the stimulus package within a week or two. July 25th was the last payment of pandemic related unemployment supplements. The bar to getting a deal through will be tough as the Senate will need 60 “yay” votes.
In last month’s letter, we discussed Opportunity Insights’ report on high-income earners being reluctant to spend at the same rate as lower-income earners. This development continued in July. We mentioned that could happen as states started to reverse course on “reopenings.” In the Harvard-based research group’s mid-July report, another development, that we have not witnessed since March, has reemerged. The amount of money that people spent on grocery goods has started to increase again while the money spent on transportation services like airline flights has started to turnover and decrease. This data confirms the spending data trends from Bank of America and JP Morgan Chase, two of the largest providers of credit card debt in the world. In summation, the real-time spending data from Opportunity Insights, Bank of America, and JP Morgan Chase demonstrates when July’s economic data is reported, throughout August, it could disappoint.
Speaking of economic data, the pinnacle of the monthly economic data through this pandemic is related to the unemployment rate and the labor market. The last time the stock market had a material sustained move higher was due to a surprisingly good May jobs report two months ago. Two months ago, the last time the stock market had a material sustained move higher it was due to a surprisingly good May jobs report. Now, we fear we are going to see a reversal of this momentum in the labor market. During the month of July, initial jobless claims started to rise again for the first time since March. The question becomes whether the rise in initial jobless claims is sustainable. We believe the rise can be. First, if we know that spending is flatlining and continues to remain below last year’s equivalent period then businesses continue to be under significant pressure to manage expenses. Small businesses do not have accessibility to liquidity that the larger companies do. As such small businesses are generally the first to close and the jobs related to those businesses are lost for a while (permanent unemployment). As of mid-July, 55% of the 132,500 business closures on Yelp have now shown to have been permanent. While Yelp is generally confined to the retail, restaurant, and personal care industries, these business closings are still jobs and paychecks for others. Lastly, regarding the labor market, the United States Census Bureau introduced their weekly Household Pulse Survey a few months ago. A major component of the survey is to provide real-time figures about certain economic measures. One that we believe is important is the real-time survey regarding the number of people gainfully employed. Recent developments in the survey for this measure are eye-opening. The number of employed Americans declined by about 6.7 million during the period between the June and July employment reports. This decline includes a 4.1 million plunge during the second week of July. The survey is still relatively new and has a limited track record; however, the United States Census Bureau is a credible institution and the survey was accurate in projecting the June jobs report. While the figure is not seasonally adjusted, the data provides another view that the economic rebound is not just slowing but maybe even pulling back.
We wrote before that another wave of layoffs was a legitimate concern. Now C-Suite executives within the financial industry are mentioning this same risk. It is worrisome that these executives are projecting layoffs across the country because financial leaders have constant dialogue with corporate CFOs. One of a CFO’s responsibilities is to maintain relationships with individuals within the banking/credit subdivision of the financial industry. If financing is ever needed by the company, the CFO needs to turn to people quickly. In return, financial leaders are keen to the mindset of the CFO and a CFO’s current priorities. “They didn’t want to lay people off over Zoom, and they didn’t want people not to have health care,” Roger Hochschild, CEO of Discover Financial Services, said in a Bloomberg interview. “You’re going to start seeing more and more of those white-collar layoffs.” We want to avoid significant market exposure at a time when layoffs are starting to increase again.
Invesco DB Optimum Yield Diversified Commodity Strategy (Ticker Symbol: PDBC) – We continue to be encouraged by the performance of the diversified commodity-focused ETF. The industrial metal alongside precious metal exposure has benefitted from the loose monetary policy of the Federal Reserve. The ETF generated north of a 6% return for the month of July which continues to offer a good risk/reward profile compared to the stock market.
Thank you for your continued trust. In the near-term, we believe some events may create volatility in the markets. State “reopenings” reversals, any COVID-19 related headlines, escalating conflict with China, the fourth fiscal stimulus package, and the November 4th Presidential Election are all at the forefront of market-moving events within the next 130 days. Be rest assured that we are monitoring all situations impacting markets. If you have any questions, you are encouraged to reach out to us!
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon.
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