Aug 13, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙“You can't put a limit on anything. The more you dream, the farther you get.” - See who said it and why it matters at the bottom.

1 big thing: A market divided
Data:; Chart: Axios Visuals

The S&P 500 nearly closed at an all-time high on Wednesday and remains poised to go from peak to trough to peak in less than half a year.

By the numbers: Since hitting its low on March 23, the S&P has risen about 50%, with more than 40 of its members doubling, according to Bloomberg. The $12 trillion dollars of share value that vanished in late March has almost completely returned.

What's happening: The record-breaking rebound has divided investors, with some betting on a new bull market run that will take stocks well above their current levels and others hunkering down for a major pullback.

Details: Many institutional asset managers continue to sit the rally out, preferring to buy bonds or stay in cash.

  • Data from the Investment Company Institute showed that money market funds remain above $4.5 trillion as of the week ending Aug. 6, with inflows to MMFs that week for the first time since mid-May.
  • Bond funds have seen inflows in each of the last three months, including $100 billion of inflows in June.
  • Stock funds, on the other hand, have seen consistent outflows with data from Bank of America showing the largest outflows in 11 weeks last week.

What we're hearing: There's a tug of war going on in the market, not just between bulls and bears but between investors who believe the economy is bouncing back and others who are simply holding on in high-flying tech stocks because there is no alternative to the equity market.

  • The former strategy has led to increased buying in small-cap stocks and re-opening plays like hotels and airlines (the JETS ETF has risen seven of the last eight days, including a 4.8% gain on Monday), as investors look to add some names to their portfolios just in case a successful COVID-19 vaccine is quickly developed and distributed.

Keep it 💯: The pain of losing $10 trillion in U.S. GDP and 53 million people who have filed initial jobless claims has been "numbed" by $21 trillion in policy stimulus — $2 billion per hour in central bank asset purchases, says Bank of America chief investment strategist Michael Hartnett.

  • "Nothing matters but liquidity."

Between the lines: The impressive rebound has masked some significant divergence, Hartnett notes.

  • If the S&P 500 were just the tech sector it would be above 4,000.
  • On the other hand, if it was just U.S. banks and energy companies it would be under 2,100.
  • So far this year, FAAMG stocks (Facebook, Amazon, Apple, Microsoft and Alphabet) are up 35% while the other 495 stocks have risen less than 5%.
2. Catch up quick

The IEA cut its forecast for global oil demand in the second half of the year by 500,000 barrels a day. (Bloomberg)

President Trump said a deal for the next round of coronavirus relief measures is "not going to happen" and with the Senate likely to recess until the end of August, there is little time for a deal before an Oct. 1 government shutdown deadline. (Washington Post)

Median apartment rent in Manhattan fell by the most since October 2011, while July’s vacancy rate climbed to a record of 4.33%, according to a report Thursday by appraiser Miller Samuel Inc. and Douglas Elliman Real Estate. There were 13,117 apartments listed for rent, the most since at least 2006. (Bloomberg)

3. Pandemic hitting city budgets harder than the Great Recession
Data: National League of Cities; Chart: Axios Visuals

Axios' Kim Hart writes: With tax revenue in free-fall and expenditures dramatically rising, the coronavirus pandemic is on pace to hit cities' finances even harder than the Great Recession.

Why it matters: Almost all cities are required to balance their budgets, and at this rate, they'll have no choice but to cut more services, lay off or furlough more workers and freeze capital projects.

The big picture: The 2019 fiscal year was the first year that most cities regained the levels of general fund revenue they'd lost due to the Great Recession.

  • Those gains going into the 2020 fiscal year were wiped out in a matter of months once the pandemic forced local economies to shut down, and it could take another decade or more to recover from the sudden, deep free-fall.
  • Between the lines: During the Great Recession, cities' year-over-year decline occurred over six years. The rapid fiscal plunge cities have felt over the past six months has been a much greater shock to cities' budgets.

By the numbers: Almost 90% of the 485 cities surveyed by the National League of Cities expect to be less able to meet their communities' financial needs this year than they were last year — the lowest level of confidence among local budget officials since the low point of the Great Recession.

  • Cities, on average, expect a 13% decline in general fund revenues in the 2020 and 2021 fiscal years.
  • All local revenue sources shrank in the 2020 fiscal year, which ended in June for many cities. Sales taxes saw the steepest drop, at 11%, and income tax fell 3.4%.
  • Revenues from property tax showed the slowest decline, but property taxes are a lagging economic indicator and typically take at least 18 months to show up on balance sheets.

What they're saying: "Cities that rely on both sales and property tax — a pretty common mix — expect the biggest hit because they're getting squeezed both in the short term and the long term, having an even more damaging impact on their bottom lines," said Christy McFarland, National League of Cities research director.

For example, Pittsburgh Mayor Bill Peduto on Wednesday said the city has spent its entire reserve fund to pay the bills and currently faces a $100 million budget deficit. Massive cuts and layoffs are coming across every department, he said.

The bottom line: With the pandemic showing little sign of abating and negotiations over federal stimulus relief for local governments stalled, cities will be forced to make even harder decisions in the coming year.

4. Inflation collapsed in Q2, but is rising fast now
Data:; Chart: Axios Visuals

The consumer price index rose 0.6% last month for the second straight time, with gasoline accounting for a quarter of the gain. Core CPI, which strips out food and energy prices, jumped by 0.6%, marking the biggest gain since January 1991.

Why it matters: The back-to-back CPI increases combined with Tuesday's bounce back producer price index reading, suggest inflation is far from dead.

  • Inflation worries also were stoked by Friday's jobs report, which showed stronger-than-expected gains last month.

Where it stands: Benchmark U.S. 10-year Treasury yields settled at 0.67% Wednesday, the highest since July 6, as the market has seen a notable reversal.

  • Last week 10-year yields stalled near record lows below 0.6%.
  • Yields have now risen in four consecutive sessions.

What they're saying: "Inflation initially collapsed in [the second quarter] as the pandemic hit, but it has recovered quickly in recent months as central banks engaged in unprecedented easing," Bank of America commodity and derivatives strategist Francisco Blanch said in a note to clients.

  • "In turn, the aggressive expansion of monetary and fiscal policy in the US has led to fears of US currency debasement and overshooting inflation."

What it means: Blanch recommends commodities, currencies like the Mexican peso and Brazilian real and Treasury Inflation-Protected Securities, which "are closely correlated to inflation."

Dion Rabouin

Thanks for reading!

Quote: You can't put a limit on anything. The more you dream, the farther you get.

Why it matters: On Aug. 13, 2008, American swimmer Michael Phelps won three gold medals at the Beijing Olympics, all in world record time, in one day.