Help Coming From The Government?

One of the most discussed topics in economics and investing is how much the elimination of the $600 in weekly unemployment benefits impacted the economy. Recently, Redbook same-store sales growth actually improved in the latest reading. It’s now positive. On the other hand, consumer confidence in the first half of August hit a 6 year low. In order for consumers to weather the storm without more stimulus, they need to get their jobs back.

The fact that consumer confidence on the labor market was particularly weak should worry investors. We will find out the truth this Thursday. Initial jobless claims are expected to fall back below 1 million as the consensus is for them to fall from 1.106 million to 987,000. Any decline would be a win because of the elimination of benefits and last week’s increase. Every economist is predicting a decline. 

So far, just 3 states are actually paying people the $300 per week. A minor boost in the data won’t be seen until September. GOP is working on a smaller $500 billion stimulus (Dems have a $2 trillion proposal). The GOP plan would expand unemployment benefits by $300 to $400 (like the executive order did), provide more money for small business loans, more money for schools, and money for COVID-19 testing.

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As you can see from the chart above, real personal disposable income fell after the stimulus checks stopped going out. Real personal income without transfers is rebounding because the labor market is improving. However, it’s not close to back to normal. The economy needs a final boost. This small stimulus wouldn’t do much because the executive order already promises the extra money for unemployment benefits. Let’s do one more $1,200 check. 

If Biden wins, we might see another stimulus in 2021 when it might not be needed. Some are predicting the unemployment rate will fall to about 8% by the end of the year. It might be 7% by the time the Dems can pass a stimulus. By the way, PredictIt shows Donald Trump has a 46% chance of winning re-election, which is higher than it was in July. We must also remember how terribly off base the polls were in 2016. 

Solid Consumer Spending

Chase’s consumer data agrees with Redbook’s results and disagrees with Indeed job postings and consumer confidence. As you can see from the chart below, in each category of states card spending growth improved since the extra $600 expired. High unemployment states had a 7.8% decline in spending and low unemployment states had a 4.1% decline. This gap has always existed. Each category’s growth rate has increased since the bottom in late March. 

However, you can’t expect people losing $600 per week to have no impact unless they get their jobs back. That’s what matters in the next 6 months. Forget about each week and ask yourself if you think the unemployment rate will be above 8% or below 8% 6 months from now. Stay bullish on cyclical stocks if you think the rate will fall below 8%.

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Consumers Aren’t Optimistic On Stocks

Here is a weird data point. Consumers aren’t optimistic about the stock market. Just 36.5% think stocks will be higher 1 year from now, while 34.8% think stocks will be lower. The bottom chart below shows that a 1.7% gap is much lower than it was for most of the past 3 years. On the other hand, you can say it’s relatively high for a post recession period. 

It's worth remembering how consumers and retail traders wanted nothing to do with the stock market in 2009. There were stories on how consumers would never come back to stocks. That was recency bias on the part of retail traders and the media. Consumers are back investing like it’s the late 1990s even though this chart shows they aren’t that optimistic.

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Bad Weather

Consumer confidence in California was below 60 as it was the lowest since 2013. That’s likely because they had to deal with the worst of the 2nd COVID-19 wave and wildfires. Making matters worse, there is a category 4 hurricane called Laura hitting Louisiana and Texas. It shouldn’t be devastating for Houston, but it will impact rural areas badly. 1.2 million people are in its direct path.

No One Wants Energy

ExxonMobil XOM was ditched from the Dow which ended its 92 year run in the index. That’s a huge signal of how hated the energy sector is. Not even the Dow wants Exxon. Exxon only had a small impact on the index because it has a low price. The stock was down 2.1% Wednesday as it fell to the lowest price since April 16^th. It’s only up 27.2% from its March bottom. Exxon was the world’s largest company in 2013. Now it has a $169.2 billion market cap which is less than 1/10^th the size of Apple AAPL.

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As you can see from the chart above, as of the end of Q1, the valuation of energy and metals relative to the S&P 500 had never been lower going back to 1926. In the past few weeks energy has been weak, while tech is on its best run since the late 1990s.

COVID-19 Update

Tech socks will decline if COVID-19 is cured or cases severely diminish. We took a step towards that on Wednesday as Abbott announced the launch of $5 test kits that yield results in 15 minutes. There will be 50 million tests per month if this is successful. That would probably eliminate the virus which is already in decline. 

There were 44,637 new cases on Wednesday which sent down the 7-day moving average to 42,658. The bad news is there were 1,289 new deaths which sent the 7-day average up 1 to 966.

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Pfizer PFE, Moderna MRNA, and BioNTech BNTX have enrolled over 50% of the people needed for phase 3 vaccine trials. In 4 weeks, they will complete enrollment. As you can see from the graphic above, as of the 21^st, there were 8 vaccines in phase 3 trials and 2 approved for early or limited use. Odds of a vaccine severely limiting the spread of COVID-19 in 2021 appears to be increasing.