The economy showing biggest contraction since the Second World War, yet the markets take it
This week America’s capital markets confirmed what Winston Churchill said, “Never let a good crisis go to waste.” Novel Coronavirus continues to ravage the United States, and this wave of epidemic has hit the confidence of the Americans even harder. In such a situation, great uncertainty is on display in Washington. The United States government, as usual, has no real plan to deal with this once-in-a-century public health crisis. Facing the 2020 presidential and congressional elections, President Donald Trump’s sudden talk of postponing the election has left the world with a lot of doubt about what’s going on in Washington. Capital markets, however, have been oddly ambivalent, generally smooth and optimistic.
For the week, the S&P 500 rose 1.7%, while the Dow fell 0.2%. Specifically, utilities were up 0.9%, banks down 1.4%, transportation stocks up 2.7%, the S&P 400 mid-cap stocks up 0.8%, the Russell 2000 up 0.9%, the NASDAQ up 4.0%, semiconductors up 4.8%, and the biotechnology index down 1.9%. If the government’s rescue is compared to cardiopulmonary resuscitation, the vital signs of the American market are intact, even a little excited, after three rounds of shock. In the medium to long term, what percentage of the U.S. economy, operating on ventilators and other life-support systems, could recover from the Pandemic? In the context, we have seen a sustained decline in the dollar index and a surge in the price of gold. Gold jumped $74, or 2.7%, this week and 27% for the year. Gold ETF saw the biggest inflows, with $1.11 billion from GLD and $990 million from IAU.
This is the busiest week of the second-quarter earnings season, with 83 S&P 500 companies reporting through Friday morning. On top of sharply lower forecasts, companies that exceed expectations continue to easily beat those that “missed” expectations. Analysts have been relatively conservative in their expectations, especially in the tech sector. Sixty-seven beat expectations, 16 missed expectations and 30 raised their earnings forecasts for the next 12 months. Since the start of the earnings season on July 13, more than 200 S&P companies have reported earnings, and nearly 80 percent have beaten earnings expectations, significantly higher than the historical average of 65 percent. The government’s rescue plan directly or indirectly benefits listed companies. The complex situation of the interaction between epidemic situation, economy and market rescue will continue. Technology companies are the most profitable. Analysts had expected a modest decline of 2 per cent, while the figures were significantly better than market expectations, reflecting the huge strength of the “new economy” during the epidemic. Meanwhile, the companies that raised their earnings forecasts were all from the technology sector.
The market news level is more stable
First, let’s look at some good news. After a year of investigations, the top four Tech CEOs (Apple, Amazon, Facebook and Google) testified at a congressional hearing on antitrust issues. In the current fragile economic environment, the market estimates that this round of antitrust investigations will be dead. Republicans and the Treasury have unveiled a fourth draft stimulus package totaling $1.2 trillion, much of it for military equipment purchases. The Federal Reserve left interest rates at zero. Goldman Sachs raised its 2021 gold price forecast to $2,300 on the basis of easy monetary policy. The PCE inflation index is 0.4%, below the Fed’s target of 2%. Housing sales were strong, with transfers up 16.6 per cent from the same period last year, partly to compensate for the market halt in March and April and partly because of the return of the population to the suburbs as a result of the outbreak. The proportion of owner-occupied homes rose to 67.9% from 64.1% in the same period last year. The Federal Reserve in Richmond’s manufacturing index rose 10 percent.
Let’s learn more about the bad news. GDP fell by 32.9% in the second quarter (at an annualized rate), down by 9% in the same period from a year earlier. Macro data completely exceeded the scope of historical fluctuations. Disposable personal income rose by 44.9 percent, and the savings rate up from less than 10 percent to 25.7 percent. While releasing the data, the BEA said it was unable to assess how the economy was performing during the outbreak. The ECB limits bonuses for European Banks. By the end of July, China had completed 23 percent of the $170 billion in imports from the United States under the first phase of the agreement, according to Chinese customs data, but because of the outbreak, it met the exception for natural disasters. The two parties have failed to agree on a fourth stimulus package, and pressure is mounting to reach an agreement before Congress adjourns in August. The University of Michigan’s consumer sentiment index fell 0.7 points from two weeks ago to 72.5.The Congressional consumer confidence index slipped to 92.6 from 98.1. Unemployment claims continued to rise this week to 1.434 million.
The worst recent bad news has come from the White House. President Donald Trump sparked a public outcry when tweeted to test the idea of delaying the presidential election. Although the White House later clarified that the election would go ahead as planned, it reflected significant uncertainty in Washington in 2020. The federal government injected money into Kodak to make drugs. It is not clear whether activating a business that has been bankrupt for years in this way is feasible.
Serious setbacks in the epidemic, the economy reopening encountered major difficulties
Covid-19 cases and hospitalizations are on the rise in California, the Southwest and the South. The intensity of the renewed outbreak is beginning to force a growing number of states to rethink the balance between opening their economies and containing the outbreak. The rebound in the real economy after the restart in early May has hit a bottleneck. The labor market data suggests the improvement in employment after the restart is at risk of being undone. The number of Americans filing for unemployment benefits rose for the second week in a row. Other high-frequency data points also indicated a slowdown in corporate sales in July and increased downside risks to the market. The government’s stimulus and aggressive policies could have long-term costs. Unlimited currency issuance and unprecedented government bailouts can only sustain the U.S. economy in the short term. And U.S. policy on all fronts — trade war, technological war, geopolitical hot spots, capital games, even legislation to cut off economic ties with China and stop repaying China’s Treasury holdings — will ultimately reflect the status of the dollar. Everyone knows that the value of any legal tender cannot be sustained if it is simply deficits, debt issuance over a long period of time without fundamentally safeguarding output.
The dollar index broke through psychological support, falling below 94.03 on Friday, its lowest level in two years. At the same time, Moody’s maintains similar concerns about current economic policy. Washington’s market rescue measures are welcome by the market in the short term, but only effective actions to strengthen public health security can fundamentally restore normal economic operation and determine the trend of the medium to long term. The current situation is very worrying. The decline in the dollar index is a result of global concerns about longer-term trends in the US. Global investors are concerned that the United States lacks the discipline to deal with the epidemic.