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Weighing The Week Ahead: Sustaining A Fragile Recovery

By Jeff MillerMarket OverviewJun 28, 2020 03:58AM ET
Weighing The Week Ahead: Sustaining A Fragile Recovery
By Jeff Miller   |  Jun 28, 2020 03:58AM ET
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The economic calendar is a big one, compressed into a holiday-shortened week. Market participants will be checking out shortly after the Thursday morning jobs report for an extended weekend – somewhere! Employment data is the focus, but ISM manufacturing, consumer confidence, industrial production, factory orders, pending home sales, and auto sales are also all on tap. Everything except auto sales is predicted to increase smartly.

The economic news is encouraging, but the worry continues:

Can the fragile recovery be sustained?

Last Week Recap

In my last installment of WTWA, I brought together evidence about the mixed messages facing investors. I expected that to be a focus for the week and it was. The chart for the week displays the market reaction, confirmed but good economic data and poor pandemic data. That tension will not end soon.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. This week I am featuring Jill Mislinski’s version, which provides a lot of key information in a single look.

SPX Index
SPX Index

The recent uptrend was interrupted by news of an increase in COVID-19 cases as well as Fed restrictions on bank dividends.

The market declined 2.9% on the week with a trading range of 5.0%. My weekly indicator snapshot monitors the actual volatility as well as the VIX (see below).

Here is the updated tracking for sectors. Most of the trends continued on a weekly basis, but there were major deviations on the “down” days.

SPXL Index
SPXL Index


Statista draws upon Harvard research using credit card data to look at year-over-year changes in consumer spending.

Covid 19 Impact On US Spending
Covid 19 Impact On US Spending

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

New Deal Democrat’s high-frequency indicators have always been a valuable part of my economic review. They are especially important as we all try to monitor economic recovery. His three-time frames all show some improvement – positive in the long-term, neutral in the short-term, and “less awful” in the nowcast. NDD has a warning, however:

…(W)hether conditions continue to improve from their recent horrible levels depends very much on the trajectory of the coronavirus pandemic. Fundamentally, this is entirely dependent on decisions made by 51 people: 50 Governors + 1 President. It is also subject to whether Congress extends the supplemental unemployment insurance payments that were temporarily enacted two months ago, but expire at the end of July. Several States in the Deep South and Southwest have started to reimpose some business closures, so continued improvement is very questionable, to say the least.

The Good

  • New Home Sales for May were 676K (SAAR) beating expectations of 635K and April’s (downwardly revised) 580K. Existing home sales were roughly in line with expectations. As usual, Calculated Risk has excellent commentary on both. Existing sales are counted at the time of escrow, so the data are more reflective of the March and April period. New home sales showed strength and may get even better, but Bill warns as follows:

No one should get too excited. I’ve long argued that new home sales and housing starts (especially single-family starts) were some of the best leading indicators for the economy. However, I’ve noted that there are times when this isn’t true. NOW is one of those times. The course of the economy will be determined by the course of the virus, and New Home Sales tell us nothing about the future of the pandemic.

New And Existing Home Sales
New And Existing Home Sales

  • Durable goods orders for May increased by 15.8%, beating expectations of 11.6% and gaining back much of April’s 18.1% decline.
  • Personal spending in May increased by 8.2%, beating expectations of 7.0%. April’s 12.6% decline was revised better from the original -13.6%.
  • Core PCE for May increased by 0.1% compared to expectations of no change and April’s 0.4% decline.

The Bad

  • MBA Mortgage Applications declined 8.7% versus a prior gain of 8.0%. The series still looks good when compared to recent years.

MBA Purchase Index NSA
MBA Purchase Index NSA

  • Initial jobless claims registered 1.480M worse than expectations of 1.250M but better than the prior week’s (upwardly revised) 1.540M. Claims have flattened out but remain elevated, especially when including the more liberal pandemic rules.

US - Sticky Claims For Unemployment Benefits
US - Sticky Claims For Unemployment Benefits

  • Continuing claims improved to 19.522M, better than the prior week’s (downwardly revised) 20.289M. This series lags initial claims reports by one week. As the economy improves, we should see it in these reports.

Continuing Unemployment Claims In All Programs
Continuing Unemployment Claims In All Programs

  • Personal income for May declined by 4.2%. While this was better than expectations of a 6.0% decline, it was much worse than April’s gain of 10.8%.
  • Rapid Loss of COVID-19 antibodies is reported in early research. Does this make these people vulnerable to reinfection? (TheScientist).
  • Hotel occupancy of 43.9% is an improvement over the prior week, but still much lower than last year. Drive-to destinations led the way. (Calculated Risk).

Hotel Occupancy Rate By Week Of Year
Hotel Occupancy Rate By Week Of Year

The Ugly

Facial recognition misuse. Like others, I am concerned about privacy and have often mentioned increased monitoring by government. This week brings a case of someone Wrongfully Accused by an Algorithm.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! The second best is planning what to look for and how to react.

The Calendar

We have a big economic calendar compressed into four days. Employment news is most important, including the official BLS numbers (on Jobs Thursday this week) as well as the ADP private employment report and the regular weekly jobless claims data. The ISM manufacturing index, one of the better early indicators, is expected to rebound. Conference Board consumer confidence, construction spending, factory orders, and pending home sales are all expected to rebound sharply.

There is no calendar for COVID-19 news, but it will compete for attention with the economic data every day. has a good U.S. economic calendar for the week. Here are the main U.S. releases.

Economic Calendar
Economic Calendar

Next Week’s Theme

The mixed messages became clearer: Economic news got better, and pandemic news got worse. This leaves investors facing a crucial question:

Can the fragile recovery be sustained?


Some do not see significant economic risk from the pandemic. They see the problem as one of misguided human reaction. Brian Wesbury and Strider Elass call it, Miscalculating Risk: Confusing Scary With Dangerous.

It’s critical to be able to distinguish between fear and danger. Fear is an emotion, it’s the risk that we perceive. As an emotion, it is often blind to the facts. For example, the chances of dying from a shark attack are minuscule, but the thought still crosses most people’s minds when they play in the ocean. Danger is measurable, and in the case of sharks, the danger is low, even if fear is sometimes high.

The authors liken the problem to an insurance actuary who made risk 1000 times greater than supported by data.

According to CDC data, 81% of deaths from COVID-19 in the United States are people over 65 years old, most with preexisting conditions. If you add in 55-64-year-olds that number jumps to 93%. For those below age 55, preexisting conditions play a significant role, but the death rate is currently around 0.0022%, or one death per 45,000 people in this age range. Below 25 years old the fatality rate of COVID-19 is 0.00008%, or roughly one in 1.25 million, and yet we have shut down all schools and day-care centers, some never to open again! This makes it harder for mothers and fathers to remain employed.

[This article reminded me a video Mrs. OldProf and I watched this week. It was sponsored by our retirement community to help those who needed to learn about their new neighbors: rattlesnakes! I now know that the harmless gopher snake is just trying to frighten me with those wide-open jaws. You can tell the difference because it has a pointed tail instead of rattles. Of course, some rattlesnakes have lost their rattles, so you need to check closely to see if the tail is pointed. Also, it is handy to have both around to eat rodents and scorpions. Oh, and don’t poke rattlers with a stick or try to shoot them].

Paul Schatz, in true analyst fashion, sees a different reason for caution in recent trading.

The theme for the week has been one of caution, not because of the Coronavirus, but because after the four, big quarterly options expiration, the stock market usually faces a headwind. Add on top of that, we have a massive quarterly rebalance out of stocks and into bonds to the tune of somewhere between $100 and $200 billion. And then there is that “little” thing called the annual Russell rebalance which takes place today at the close. There have been all the makings of a pause or small pullback for stocks.

David Templeton sticks to the economic data in his analysis of the LEI, participating in the “V” recovery. He writes:

Certainly, news around the virus is making headlines. However, as more states and their economies open up, an improving economic environment becomes more sustainable.

Some Important Facts

To make sound investment decisions, start with sound data.

  • The pandemic is surging in many states, including my new home state.

States COVID Trends
States COVID Trends

  • This is delaying the Great reopening in some states (Barron’s).

The past week, however, has changed that seemingly inevitable narrative. Covid-19 cases are surging again in some parts of the country, forcing a change in the reopening timeline. Texas has closed its bars, Florida paused its reopening schedule, Apple (NASDAQ:AAPL) has shut stores it had reopened, and Disneyland in California is postponing its comeback. The S&P 500 ended down 2.9% for the week.

The stocks everyone liked at the start of the pandemic are rising again, and the stocks sensitive to a “return to normal” have stumbled. That means Zoom Video Communications (ticker: NASDAQ:ZM), Etsy (NASDAQ:ETSY), Peloton Interactive (NASDAQ:PTON) have been flying, as Royal Caribbean Cruises (NYSE:RCL) and United Airlines Holdings (NASDAQ:UAL) fall. Evercore’s “quarantine” portfolio has outperformed its “rebound” portfolio by 10% since June 8.

And the implication:

Are statewide lockdowns coming back? Most analysts say no. Governors are highly reticent to issue broad stay-in-place orders now that they have better capabilities to test people widely and pinpoint hot spots. But it doesn’t take government-imposed shutdowns to affect the economy. When the disease is spreading, some people get scared and stay home.

“If fatality rates start to increase, we don’t need an official shutdown for economic activity to be impacted dramatically,” Dennis DeBusschere, the leader of the portfolio strategy team at Evercore, said on a call this past week with investors. “We’re going to see natural social distancing, which has already started in Houston and, to a lesser extent, Miami and Phoenix.”

  • Expanded testing does reduce the percentage of positive rates, since early testing was focused on sicker people.

Daily Tests Turning Postive
Daily Tests Turning Postive

  • The increase in COVID-19 cases is not explained merely by additional testing.

Wapo Testing Vs Cases
Wapo Testing Vs Cases

The market rebound has been concentrated in a small number of stocks.

Market Cap
Market Cap

And this also applies to valuation.

S&P 500 Forward PE Ratio
S&P 500 Forward PE Ratio

The facts suggest investor caution. As usual, I have a few more comments in my “Final Thought.”

Ideas for Investors

I have decided to switch the investor section to a separate post. I hope to run it nearly every week, calling it Investing for the Long Term. In last week’s edition I reported on results from our most recent Wisdom of Crowds survey. As usual I linked to several of my favorite sources for investment ideas. In each case I added a comment about how I might use the idea and also related it to our Great Reset results. I hope readers will find this valuable and that my colleagues will consider the Great Reset matrix as part of their selection process. Wouldn’t you like to know about movie theaters? Or restaurants? Or business meetings?

One of my personal 2020 resolutions was even more emphasis on investor education – not just recommending stocks but learning how to find suitable choices. I have created a resource page where you can join my Great Reset group. You will get updates about what is being studied and can join in the process. There is no charge and no obligation, but I hope you will join in my Wisdom of Crowds surveys. I need more wise participants! The latest survey results are part of my most recent report. The results of our team effort will be published on a regular basis, so you will be joining me in contributing to a greater good.

Quant Corner and Risk Analysis

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update, featuring the Indicator Snapshot.

Quant Corner and Risk Analysis
Quant Corner and Risk Analysis

For a description of these sources, check here.

The C-Score remains at levels never before seen. It is combining the sharp economic rebound with pandemic effects. When we are able to separate the two, a current mission of Dr. Dieli, it will provide more guidance on the timing and extent of the recovery. I continue my rating of “Bearish” in the overall outlook for long-term investors. I’ll comment further on my reasons in today’s Final Thought.

The Featured Sources:

Bob Dieli: Business cycle analysis via the “C Score”.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies. This week Brian also takes note of the improvement in corporate credit spreads.

David Moenning: Developer and “keeper” of the Indicator Wall.

Doug Short and Jill Mislinski: Regular updating of an array of indicators, including the very helpful Big Four.

Georg Vrba: Business cycle indicator and market timing tools. Georg’s unemployment monitoring tool, based upon weekly claims, shows no significant recovery.

iM-Weekly Employment Monitor
iM-Weekly Employment Monitor

Final Thought

A reader asked why I am so bearish when there is so much good news. A fair question. My conclusions are based upon proven indicators, which I mentioned last week without elaboration. Partly it is a question of the difference in time frame for traders and investors. Here is more detail. I have traditionally controlled risk by considering relative valuations of stocks and other assets, the likelihood of a recession, financial stress, and quantifiable factors not picked up on the regular indicators. Here is what I see:

Valuations are very high on a forward earnings basis. I know that many have seen valuations as elevated for many years using assorted methods. There are also many critics of forward earnings. A young man once wrote in response to a question forward earnings were used only by bullish analysts! Personally, I employ that method because I would rather make an imperfect forecast than an accurate account of history. The history buffs use it to forecast anyway. Brian Gilmartin has done everyone a great service by maintaining focus on this indicator, accurately reporting what is out there. The problem is that we cannot depend on the estimates right now. Most investment managers are looking to 2021 and 2022, but even those numbers are uncertain. Until we know more about the economic rebound, we just won’t know about earnings.

Recession odds are 100%. Most of the big market declines – 40% or more – come during recessions. People spent years on recession alert. Guess (NYSE:GES) what? No recession indicators are required right now. The economic indicators may look a little better, but they are at dismal levels.

Outside risks are extremely high. We can debate about how the pandemic crisis will play out, but we cannot debate about the risk. Even if Brian Wesbury is correct in analysis, no one can relieve the fear. That perception drives economic growth, politics, and markets. The coach on the rattlesnake video was well-informed and persuasive, but…..

Stock market strength has provided a false sense of security. The leading stocks can also lead downward. Few investors have considered the actual downside risk in their portfolios.

There is a good solution ahead. It might be a vaccine, but more likely will be a combination of partial solutions – social distancing, regulations, testing, tracing, and a slower pace of reopening. Individual effort will help, but leadership is also required. I cannot force my fellow shoppers to wear a mask.

Additional restrictions may be coming. The US faces travel restrictions from other countries where we are seen as a new Coronavirus hot spot.

My family plans to celebrate July 4th on our patio, watching fireworks from there. I sincerely hope that all readers have a safe holiday weekend, wherever you choose to go.

I’m more worried about

State Tax Revenue Drops In Recessions
State Tax Revenue Drops In Recessions

I’m less worried about

  • And yet, scientists continue to cooperate. From TheScientist:

The US and China, the largest scientific research producers, are now international adversaries in the midst of a global health crisis. Since the new coronavirus was discovered, geopolitical tensions between Washington and Beijing in relation to COVID-19 have been appearing on major news outlets daily, and the US-China trade war has escalated to a looming “new cold war.” Despite such turmoil, scientists around the world, including researchers in the US and China, are collaborating at a higher rate than ever before to address COVID-19, according to our analysis of SCOPUS bibliometric data.

  • The speed of vaccine production. Companies are scaling up manufacturing even before a vaccine is approved. (MarketWatch).
  • Will a vaccine be approved before the election? Jefferies (NYSE:JEF) health-care strategist Jared Holz thinks so, based partly on “signals from vaccine-development companies.” (MarketWatch).
Weighing The Week Ahead: Sustaining A Fragile Recovery

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Weighing The Week Ahead: Sustaining A Fragile Recovery

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