Stocks had a great week as vaccine hopes and better than expected data on jobs boosted investors appetite for risk. The market has been able to shrug off fears of a “second wave” of COVID-19.

The momentum to the upside is just too strong and has withstood a couple of brutal days. We saw the DOW plunge 1700 points a few weeks ago and then 700 points last Friday, but in both cases investors jumped back in to buy the dip. The two bad days remind us that volatility is still high and we have to avoid getting too complacent - the market can change quickly.

The two big July questions are still waiting to be answered.

1. Will consumer spending slow down because of the rising number of COVID-19 cases?

2. What is Congress going to do to support the economy as the small business loan program and expanded unemployment benefits winds down?

What We Are Watching

1. What are consumers up to?

We’ll start with the positive news. Consumer confidence hit a 3 month high in June, showing a nice boost from numbers that came out in May:

The number of people flying continues to increase, but the evidence appears to show the recovery starting to stall out. The last available data from the TSA is for July 1st, and the agency will not provide weekend numbers until Monday morning. We would expect a nice bump with Independence Day this weekend:

The most concerning consumer evidence comes from Open Table. The platform measures people going out to eat at restaurants. If you are looking for evidence that shows rising COVID-19 cases are influencing consumers’ behavior, this would be your stronger argument. The numbers out of Arizona, Florida, Texas, and California have declined over the last one to two weeks:

Gas Buddy, a platform which examines how often people fill their tank, showed more bad news. The number of people going out to fill their tank declined week-to-week. People staying in more means less people going out to eat and going shopping. If this trend continues, it could also dent oil prices:

JP Morgan saw a decline in spending on its debit and credit cards. A trend we want to continue to monitor through the beginning of July.

The data that has come out in the last week is mostly negative as it relates to consumers. If these trends progress, it will give us a disappointing answer for July’s question one. However, there is still not enough data yet to draw conclusions. We will get more clarity on how rising COVID-19 cases are influencing consumers over the next two weeks.

2. Jobs!

The jobs report saw the US economy add nearly 5 million jobs in the month of June. It was a big beat from what many economists were expecting. The unemployment rate fell to about 11%. The report showed about 40% of the jobs growth came in the leisure and hospitality, which makes sense as states try and expand reopenings:

We do find a negative in the jobs report - permanent job losses. Initially, a vast majority of job losses were considered to be temporary, but this report indicates that a growing number of job losses are long term.

We are once again disappointed with what we see in jobless claims. The weekly report shows about 1.5 million people filed initial jobless claims for the fourth consecutive week. We are also still discouraged at the high number of continuing claims:

3. Housing Data

The Case-Shiller Housing Index gave us a look into the housing market and found that it’s holding up well during the pandemic. Home prices have risen across the country in the nation’s largest cities. Phoenix is leading the pack with home prices rising by nearly 9% in the city from last year:

4. Vaccine Hopes

Medical experts emphasize that there is still a long path ahead for developing and mass producing a vaccine, but we did get some good news from Pfizer this week. A paper was published on a vaccine they are working on and it looked at data from the first clinical trial. Some patients who took the vaccine had “immune responses” which is the goal. The paper has not yet been peer-reviewed and there is much more testing to be done, but the progress is good news:

5. Congress + White House = Stimulus?

Congress and the White House both say they want to put together another stimulus package, but will they come to an agreement on anything? President Trump and Republican senators both said this week that they do not want to keep giving out the expanded unemployment benefits after they expire at the end of July. The president said he is in favor of one more big check to Americans. Democrats in the House have passed a bill on infrastructure which they argue would help boost the economy. They also passed what they dubbed the Heroes Act, which had provisions to expand unemployment benefits, more checks to Americans, and aid to state and local governments. The infrastructure bill and Heroes Act stand very little chance in the Republican led Senate. Do we need another stimulus bill? Yes. Will Republicans and Democrats agree on anything? I hope so:

6. US and China

The relationship between the United States and China is not getting any better. China has aggressively stripped Hong Kong of its independence which has angered not just the United States both Europe too. The White House has been reluctant to take economic sanctions against China because the president does not want to rock the stock market before the election. However, the Senate and House overwhelmingly passed legislation that would take action against banks if they do business with Chinese officials who “violate the autonomy of Hong Kong.” If and when President Trump signs this bill, China will most likely find a way to retaliate:

It was not a Happy Friday for the stock market. We saw the Dow, Nasdaq, and S&P each fall around 2.5% to close out the week. 

The market has been stuck in neutral through June. The S&P and Dow are around where they were when we entered the month. Investors have grown more cautious as the rising number of COVID-19 cases in some parts of the country threatens the economic recovery. 

There are two big questions for the market in July which will influence what happens next. 

1. Will consumer spending slow down because of the rising number of COVID-19 cases?

2. What is Congress going to do to support the economy as the small business loan program and expanded unemployment benefits winds down? 

What We Are Watching

1. What are consumers up to?

- Data from the TSA shows more than 600,000 fliers traveled on Thursday. The data shows the number of fliers continues to increase, but the pace is beginning to slow down. Commercial air travel is still down more than 75% from pre-COVID-19:

- Open Table has been providing data on people going out and dining in restaurants. While the numbers have been bad compared to pre-COVID, we had been seeing a steady increase in people going out to eat. We saw this week, that nationally, the recovery has stalled. We want to see more than one week of data before we draw conclusions, but we will be certainly monitoring data for next week to see if this was a hiccup or a developing issue:

- When we look at the data by state, we can try and get a sense of whether or not rising COVID cases in certain areas are impacting consumers. Arizona, Texas, and Florida have all seen a decline in people going out to eat over the last two weeks, according to the Open Table data. We want to see if this concerning trend continues into July

- JP Morgan has been putting out a spending tracker using data from its own customers. They put together the study using a seven day average and the data lags slightly. However, it has continued to show consumers spending more which is a positive sign for economic recovery:

- Another great tool for tracking consumers comes from GasBuddy. The platform uses its data to determine gasoline demand and has found that while demand has recovered, there appears to be some stalling in that recovery:

2. Jobs, Jobs, Jobs

- We were incredibly discouraged by the claims report that came out this week. For the third straight week, initial jobless claims were about 1.5 million:

- We saw continuing claims drop below 20 million, which beat expectations, but that is still a very high number given that many states have reopened their economies. The big concern here is that jobs are not returning and we'll see a large amount of permanent job losses that cause long term economic pain:

3. More Stimulus?

- Republicans and Democrats have both expressed a willingness to provide more economic stimulus this summer. However, they are all over the place in what they want and that could make compromising and actually drafting a bill very difficult:

- The enhanced unemployment benefits (the federal government providing an extra $600 per week for unemployment claims) will expire at the end of July. The market will want to see those benefits extended, but Republicans have been apprehensive. Conservatives, especially in the Senate, are worried that these big unemployment checks will discourage people from going back to work:

4. Oh yeah, there's an election this year!

- We have an election this November. There have been several polls showing Joe Biden ahead and some polling indicating that Democrats could sweep and flip the Senate this November. While we think its way too early to start guessing who wins, the market will start to react to polling as the election gets closer:

- We have been searching out evidence to see if investors are changing their behavior because of recent polls. The movement in the market seems to indicate that the election is not a big driving factor right now. But! There was this nugget from Fox Business on Friday that some hedge funds would not be thrilled with a Biden win:

- Final point on the election (you will hear this a lot from us the next few months). Investors do not like change and when a new person heads into the White House, there will be investors who let their political bias influence their behavior. When President Obama was elected, there were investors who sold, and that proved to be a bad move. When President Trump was elected, there were investors who sold, and that was a bad move. No matter what happens in the election later this year, please, do not let your political bias lose you money.

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