This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Monthly Equity Monitor
National Bank of Canada Financial Markets
July: Consumer-discretionary stocks are trading at a new high, with a forward price/earnings ratio close to 40. Why are investors bidding up a sector so closely linked to a still-uncertain recovery of labor markets?
This is where government programs come in. Despite recession and the deepest job losses in generations, labor income is surging and consumer spending is rebounding. This unprecedented development is due to the enhanced generosity of government social benefits.…[But] it is important to keep in mind that a divided U.S. Congress has yet to commit to a second round of direct payments to households after the first round expires at the end of July. Failure to do so when employment is still well off its prerecession peak is likely to shake equity markets, now trading at hefty valuations.
—Stéfane Marion and Matthieu Arseneau
Animal Spirits Rising, but…
Economics Group
Wells Fargo Securities
July 9: With containment measures being relaxed around the country, economic activity is slowly starting to pick up from the virtual standstill in April. How quickly the economy is able to return to its pre-Covid-19 level of output will depend primarily on the coronavirus, but also on how willing consumers and businesses are to spend and invest.
Our Animal Spirits Index, or ASI, a five-variable-dynamic-factor model, attempts to capture how people feel about the economy. The inputs are 1) the
S&P 500
index, 2) the Conference Board’s consumer confidence index, 3) the yield spread, 4) the
VIX
index, and 5) the economic policy uncertainty index. On a basic level, an ASI index value above zero indicates optimism, while a value below zero suggests pessimism.
In June, the ASI came in at minus 0.19, an improvement of 0.35 of a point from May, but still negative. While sentiment seems to be moving in the right direction from its April bottom, it is difficult to remain optimistic in the face of the ongoing public health crisis. Failure to contain the outbreak would undoubtedly stifle the burgeoning recovery. That said, Congress, which reconvenes in mid-July, has the opportunity to buoy sentiment with another stimulus bill.
—Azhar Iqbal and Hop Mathews
Slow Slog Ahead
Economic & Market Commentary
Maria Fiorini Ramirez Inc.
July 9: Seasonally adjusted initial unemployment claims for the week ended on July 4 were 1.314 million, which followed a revised 1.413 million in the prior week (originally 1.427 million). Today’s total was a bit lower than generally anticipated. To put these data in perspective, before the pandemic surge, the highest single weekly tally ever was 695,000 in 1982. Now, four months into the crisis, initial claims are still running above an astonishing 1.3 million per week.
Continuing claims (reported with a one-week lag) totaled 18.06 million in the week ended on June 27, down from a revised 18.76 million a week earlier (originally reported as 19.26 million).
On a four-month view encompassing March through June, payrolls are reported as down by a net 14.66 million, while continuing claims are up by 17.54 million. Given the enormity of these numbers, the vast two-way flows that underpin them, and the huge challenges involved in collecting and modeling the raw data under current circumstances, these results are at least in the same (albeit quite expansive) ballpark. The approximately three million difference between the reported gain in nonfarm payrolls and the change in continuing claims is certainly nothing to sneeze at.
That initial unemployment claims are still running over 1.3 million per week, with a stubbornly high level of continuing claims, indicates the difficulties involved and the time it will take to heal a labor market thrown into turmoil by unprecedented circumstances.
We continue to believe that, after an initial period of a sharp but partial rebound as the economy reopens, the remainder of the process is going to be prolonged, and that the road back to February’s peak employment levels will be a long and bumpy one.
—Joshua Shapiro
What Bank Stocks Bode
The Relative Report
Brogan Group Equity Research of Wellington Shields
July 9: Everywhere I turn, the talking heads are talking about the banks, how bad they look, and how much they have underperformed. This, to me, is a very binary call. You either step in today and buy the banks with the expectation that they are at a triple bottom, or you sell them with the expectation that they go to new lows.
We do not have a horse in this race because our Money Flow Model has told us since Dec. 20 to step aside, as the [downside] risk for the overall equity market and the banks is too high.
The last time we saw a similar relative performance triple bottom was on July 6, 2016, when we were very bullish on the stock market because the money flows to the banks were very positive (88%). Today, we are at what looks to be another relative performance triple bottom, but we are not bullish because the bank money flows are extremely negative.
There is a very good chance that we are going to see lower prices in the banks, which will probably pull down the whole stock market.
We continue to own defensive noncyclical assets, with the expectation of high market volatility over the next several months.
—Terence Brogan
Food for Thought for Bulls
Morning Briefing
Yardeni Research
July 9: As a result of the lockdowns, the four-week average of U.S. gasoline usage plunged 43% from the March 13 week through the April 24 week, when it bottomed at 5.3 million barrels a day. Since then, through the July 3 week, it is up 60%, to 8.5 million barrels a day. It needs to rise another 14% to get back to a normal 9.7 million pace. It seems to be on the road to doing just that, though a slowing of state reopenings could place some roadblocks in the way.
Admittedly, gasoline usage might be overstating the extent of the economic recovery, if more people are choosing to return to work by car, rather than by public transportation. Then again, lots of people who have the option continue to work from home. In addition, very few Americans are likely to be vacationing overseas this summer. That means that more of them are likely to be taking driving vacations within the U.S.—a positive for the economy.
Another happy-go-lucky indicator: The Citigroup Economic Surprise Index soared to a record 221.3 on Tuesday, July 7, up from a record low of minus 144.6 on April 30.
In addition, the S&P 500 index’s [estimated] forward revenues, earnings, and profit margin continued to edge higher during the July 2 week, as they have been doing for the past seven weeks. This strongly suggests that the S&P’s actual revenue, earnings, and profit margin all bottomed during the second quarter and should be moving higher during the third quarter.
—Ed Yardeni
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