This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Misleading Unemployment Rate
Economic and Financial Analysis
July 2: The June jobs report showed that U.S. payrolls rose by 4.8 million, well above the 3.23 million consensus estimate, while May’s payrolls gain was revised up to 2.699 million from 2.51 million. Fantastic. It shows how the reopenings have allowed businesses to get into gear and bring workers back. Leisure and hospitality was the biggest contributor, jumping 2.088 million, with retail up 740,000, but there were gains everywhere, including 903,000 for trade and transport and 568,000 for education and health care.
The household survey shows the unemployment rate dropping further, to 11.1% from 13.3%, having peaked at 14.7%. But that isn’t the true state of affairs, and it isn’t just down to confusion over how to fill out the response form. If you dig into the jobless claims report, you find that the total number of people claiming unemployment benefits in all programs rose by 916,000 in the week of June 13, taking the total number of claimants to 31.49 million. This is nearly double the 17.75 million “officially” unemployed based in the jobs report. Remember, you have to be actively looking for work to be classified as “officially” unemployed, but you don’t need to do so in order to claim benefits right now—hence the 11.1% figure is grossly understating the true picture.
Two Pluses for the Muni Market
July 1: The infrastructure bill being considered by Congress contains two pluses for the muni market. The first is a resumption of the Build America Bonds program. This program enjoyed great success during the last recession, with the issuance program lasting from April 2009 through December 2010. It allowed issuers to issue bonds in the taxable bond market with a federal subsidy on the interest payments. The issues had to be for new projects, which was the stimulus part of the program. The resumed program may not have the same 35% subsidy that the original had, but rather may hard-code the subsidy at a lower level. Sequestrations at the federal level caused that original subsidy to go from 35% down to the mid-20% levels over time.
Another positive aspect in the infrastructure program is the return of advance refundings in the tax-free bond market. This practice was removed by the 2017 tax bill, but had been a way for municipalities to save money by refunding older higher-coupon bonds to their first call date. Anything that allows municipalities to lower their cost of future funding is a very big positive, in our opinion, as we move forward from the pandemic.
John R. Mousseau
Coming: More Fiscal Stimulus
Politics, Policy, and Portfolios
Wells Fargo Investment Institute
June 30: Lawmakers worked judiciously to pass a series of relief packages to help offset the pandemic’s economic fallout. At first glance, May’s employment data might indicate that the relief packages were largely effective as the economic reopening continues. Yet, the 2.5 million jobs added [in May’s initial employment report] represent a fraction of the jobs lost this year, and the Department of Labor estimates that the unemployment data may have been understated by 4.7 million workers. In fact, the U-6—a broad unemployment measure that includes those who have given up looking for work and part-time workers who prefer to work full time—remained above 21% in May. Moreover, the additional $600-per-week jobless benefit will expire in July, and new pockets of Covid-19 outbreaks are emerging in parts of the country. These factors strengthen the case for another round of fiscal stimulus.
We expect a moderate recovery, following a strong third-quarter start. To achieve our year-end forecast of a 9.5% unemployment rate, continued economic reopening is necessary. We believe that additional relief is essential to support the reopening, and that is likely to include another round of stimulus checks for consumers and financial support for small businesses, along with liability protection for them. Congress is likely to pass a Phase 4 relief package this summer, but one that is more targeted to the hardest-hit businesses and includes additional aid for cities and states.
Don’t Dismiss Auto Stocks
June 30: Global automotive stocks are sporting their worst performance, in relative terms, since March 2000. At the epicenter of the selloff have been two tectonic shifts. First, the Covid-19 crisis has led to widespread shutdowns and arrested travel. Second, and probably more important, a move toward “cleaner” electric vehicles, or EVs, has boosted market darlings like
(ticker: TSLA) and
(NKLA), at the expense of more-traditional manufacturers like
Historically, fear has been the author of bull markets, and the unloved auto sector might be ripe for mean reversion. First, auto sales are strongly (inversely) correlated to the unemployment rate, and as more economies reopen, car sales should pick up. Second, gasoline prices are now cheap, meaning that price-conscious users might opt for traditional cars at the expense of more highly priced EVs. Finally, traditional automotive companies are stepping up their EV strategy, meaning the first-mover advantage for electric-car companies will wane.
In the past, auto companies have usually been a buy when their price/earnings ratios are high and rising, as the decline in earnings is discounted as a cyclical event. This time around, investors are betting that the fall in earnings could be structural. They might be wrong.
Biden, a Blue Wave, and Markets
View From the Tranches
June 27: It has been easy to forget that we are in an election year. A little over four months from now, Americans will be heading to the polls to vote for the next president. It became clear this past week that Joe Biden is now the favorite to win in November. The Siena College/NYT poll had Biden ahead, 50% to 36%, similar to an earlier poll from Fox News that showed Biden in front, 50% to 38%. Polls in battleground states similarly show Biden with a growing lead. With the economy still in recovery mode, the odds of Trump winning re-election don’t appear great. The markets will have to start thinking about what a Biden victory will mean. Furthermore, a Biden victory would most likely be accompanied by a blue wave, leading to single-party control. Historically since 1945, the S&P 500 index has outperformed under single-party control, rising by an average of about 16% under all-Republican governments versus around 14% under all-Democratic governments. This compares with a long-term average return of about 11%.
Some key items to consider would be changes to corporate taxes, as well as pressure to raise the minimum wage. Fiscal stimulus would probably be focused toward households directly (think of helicopter money), and federal aid to states and local governments would flow freely. Lastly, infrastructure spending would get a big boost. In short, a blue wave would be met initially with greater market volatility, as investors reposition and try to identify winners and losers in a new regime.
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