Tech Keeps Winning; Rising Unemployment Threatens Recovery

Friday, July 31, 2020 4:42 PM | Bobby Raines

July 31, 2020 - This week was a big week for economic data and earnings reports.

We got the GDP figure for the second quarter, there was a Federal Reserve meeting and hundreds of companies, including four of the world's biggest companies, reported earnings.

Potentially lost in that data, most of which dates to June 30 and before, were this weeks reports on unemployment claims. Last week, 1.43 million people filed claims for unemployment for the first time. This was an increase from the previous week, albeit a small one, marking two consecutive weeks that new claims have risen. Continuing claims, which lag by a week (so this week's report was for the week ended July 19), also rose.

We now have enough data to see that new and continuing claims both seem to have bottomed the week of June 12. That was, not coincidentally, the week that new coronavirus cases bottomed in the U.S.

Federal Reserve Chair Jerome Powell said in his press conference this week that the coronavirus "might be the most central fact or most central drive of the path of the economy." He pointed to high-frequency data that shows the recovery is slowing while virus cases rise.

We don't know exactly which data Powell looks at, but we do know that J.P. Morgan's credit-card spending tracker seems to have stalled out in early June after getting back to a level that was down about 10% from last year and currently is down about 12%. The TSA meanwhile is averaging about 660,000 passengers screened per day, down from about 2.6 million passengers per day a year ago.

That 10% is, coincidentally, about how much the economy contracted in the second quarter (the headline number of 32.9% is an annualized figure). The GDP report contained some other, more interesting numbers than the headline figures.

Namely, personal incomes increased significantly in the second quarter. This was due to what are called "transfer payments", which is the economists' term for checks from the government. The second-quarter included by the $1,200 one-time payments and the $600-per-week boost to unemployment. Personal spending meanwhile fell, which makes sense given that people are spending less money on going places and doing things.

Were it not for those transfer payments, personal incomes would have fallen due to declines in wages and income that goes to business owners.

This is where that rise in unemployment starts to be important. The boost to unemployment income has expired and needs to be renewed by Congress if the program is going to continue. Without the boost, unemployment pays about 45% of a worker's previous income, which is not a sustainable living situation for most people.

A rising number of unemployed people with the enhanced unemployment benefits was bad for the economy, but that is going to get worse as the level of consumer spending is going to fall drastically as millions of families take a huge whack to their incomes.

Experts estimate that it will take weeks from the authorization of new unemployment benefits for those checks to start going out, so the sooner Congress can act, the better.

What did this mean for stocks this week? Well, as we've pointed out in this space a number of times, the market seems to have two modes. Earnings disrupted that pattern somewhat as some stocks have unexpectedly done much better than expected, while others have badly missed expectations. In general, we've tended to see broad rallies when there is good news about the virus. The other mode sees mega-cap tech stocks lead the way while companies that need things to reopen (airlines) and a growing economy to do well (banks) stagnate.

Thursday evening we got earnings from Alphabet (GOOG), Amazon (AMZN), Apple (AAPL) and Facebook (FB). All four beat estimates handily, and all but Google said enough positive things about business conditions to rally Friday.

Exxon (XOM) and Chevron (CVX) both reported earnings Friday and the results were not good. Oil is used primarily for transportation. A global slowdown in the economy is always bad for oil prices, but when it comes with strict limits on travel, oil demand plummets. The price for crude is still depressed even as production in the U.S. and internationally has been slashed. Both companies tried to reassure investors about their ability to continue paying dividends, but those reassurances seldom work as investors often think dividends can only go up.

This combination of news highlighted the recent inequality in the market. Those big tech companies (Alphabet excluded) soared Friday, while energy fell.

Friday's results were similar to those for the whole week. The tech and communications (this is where Facebook, and Alphabet are classified) sectors rose, while financial services and basic materials fell.

Joining the decliners this week was the biotech sector, which has been counter to the recent trend, but with lots of companies chasing the same prize, it might make sense to take some money off the table, particularly as several companies have started stage three clinical trials.

All told this week, the S&P 500 gained 1.73%, while the Dow Jonws lost 0.16% and the Nasdaq jumped 3.69%.

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