Markets gradually moved higher during the week on reasonably good economic news, earnings reports, improving labor data, optimism that the US Congress would strike a new fiscal stimulus package and slowing COVID deaths and cases. The TSX rose 2.3% during the week (-3.0% YTD), the S&P500 gained 2.5% (3.7% YTD), EAFE gained 2.3% for the week (-8.6% YTD) and the NASDAQ pushed higher, gaining 2.47% for the week (22.72% YTD). The larger move in the mid-cap area, with the Russell 2000 gaining 5.98% and the S&P 400 gaining 4.02% for the week, was an encouraging sign that market breadth is improving. Both indices are down 5.95% and 6.03% YTD, respectively.
On Tuesday, US factory orders moved up 6.2% in June for the second month in a row against expectations of 4.6%, indicating that reopening continued despite the increasing COVID cases. The Institute for Supply Management (“ISM”) reported that its manufacturing index for July came in at 54.2% against expectations of economists surveyed of 53.6% and the June report of 52.6%. This is the third month in a row the ISM showed improvement. (A number above 50 indicates expansion in manufacturing activity.)
Later in the week on the employment front, the US Labor Department reported that weekly initial unemployment claims fell by 249,000 to 1.19 million from 1.44 million in the previous week. The decrease in claims is the largest one-week decline since the beginning of the pandemic. Additionally, the department reported that employers added 1.76 million jobs in July, further reducing the unemployment rate to 10.2% from 11.1%, however, this data is suspect because it is seasonally adjusted. In Canada, business activity also expanded, and the domestic economy added 418,500 jobs in July. The unemployment rate in Canada fell to 10.9% from 12.3% in June.
The US Congress was front and center all week with the continuing debate on the next stimulus package. Early in the week, Republican leadership suggested any agreement might be two weeks out. The White House added to the pressure with the threat of an executive order if a bipartisan deal was not reached. By the weekend, the president ran out of patience with his Congress and signed four executive orders. The orders eliminate the payroll tax, extend unemployment benefits by $400 per week (down from $600), defer student loan repayments through the end of the year and extend protections against evictions. President Trump is also looking at cuts to income taxes for lower and middle-income individuals as well as a cut in capital gains tax. The president’s authority to spend taxpayer dollars without congressional approval could be challenged and sets a dangerous precedent if left in place, as the power of the purse resides in the House. However, the level of congressional obstruction in the face of the current economic crisis is unprecedented and has polarized the country. The upcoming US election will undoubtedly be one of the most contentious elections in US history and could quite likely be resolved in the US courts.
All the negative news coming out of the US regarding COVID, unemployment data, bickering in Congress, tweeting and friction with trading partners and China, along with the US Fed interest rate policy reducing the spread between interest rates with other countries, are all factors placing pressure on the US dollar and the US dollar as the world’s reserve currency. A strong currency signals a strong economy, whereas a weak dollar suggests a weak economy. International capital flows vote every day in the currency markets. The benefits of a strong currency are imports become cheaper, however, on the flip side, exports become more expensive. With a weak currency, the opposite applies. As the world’s reserve currency, the US has benefited from virtual unfettered access to borrowing internationally. By all appearances, this access is coming to an end as China and others move away from trading and borrowing in USD.
The fiscal, monetary, and social actions by governments in an effort to safeguard the populations from the pandemic may be the tipping point in most countries. Debt per GDP, at unsustainable levels before COVID, exploded when measures were enacted to keep economies on life support. Higher debt levels, no doubt, will be resolved with higher taxes, creating an additional headwind to what was considered barely positive economic growth rates pre-COVID.
Meanwhile, civil unrest will be on the rise in all western countries as citizens express concerns over elected officials and bureaucracies that they believe have not always acted in their best interests. Financial markets are behaving and will continue to behave in ways perplexing to market followers as capital seeks safe havens without regard to fundamentals.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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