Sep 4, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🗓Happy early Labor Day weekend! Markets will be off on Monday to celebrate the holiday. I'll be back in your inbox on Tuesday.

  • Follow me on Twitter today (@DionRabouin) where I'll be talking about the August jobs report with some of the top minds in finance and economics.

🎙“The reality is: sometimes you lose. And you’re never too good to lose. You’re never too big to lose. You’re never too smart to lose. It happens.” - See who said it and why it matters at the bottom.

1 big thing: Maybe stocks can lose?
Data: FactSet; Chart: Axios Visuals

The Nasdaq fell 5% on Thursday, its worst decline since March, and the S&P 500 had its worst session since June, but no one was quite sure why.

What happened: Fund managers and strategists posited that profit taking or rebalancing was to blame as no fundamental drivers for the sell-off were apparent and it remains unclear whether Thursday was a fluke or the beginning of retrenchment from what most Wall Street analysts viewed as an overextended market.

What we're hearing: "Today's swing was steeper than the markets have become used to seeing but we should expect more choppiness going forward, not less, given pandemic, economic and election uncertainty," Nela Richardson, investment strategist at Edward Jones, tells Axios.

Getting technical: Bloomberg's Vildana Hajric and Katherine Greifeld note that the S&P was trading around 15% above its 200-day moving average. The last time it reached such heights was January 2018, when a massive volatility shock sent the index into a correction.

  • Sentiment also has gotten lopsided, with many investors sitting on the sidelines while those that have ventured into the market are almost uniformly bullish.
  • Bearish bets on NYSE-listed stocks had fallen to a six-year low in mid-August and Citi's panic/euphoria model is showing one of the longest runs of extreme bullishness since the early 2000s.

The intrigue: No other assets responded strongly to the stock market's swan dive.

  • Gold, a historic safety play in times of market distress, fell for the second day in a row, and silver prices declined by nearly 2%.
  • WTI crude oil dipped just 0.25%.
  • The dollar, which has sunk as the market has risen since the start of the third quarter, was little moved, edging lower by 0.1% on the day.
  • The Japanese yen and Swiss franc, both traditional currency safe havens, gained just 0.1%.
  • U.S. Treasury bonds were little moved, with yields on the benchmark 10-year note declining by just 3 basis points, about the same as the previous day when stocks rallied.

Where it stands: "The underlying feeling is that this was long overdue in the stock market," Kathy Jones, chief fixed income strategist at Schwab, tells Axios.

  • "If this were to continue I expect you’d see more of a bond market reaction, but a 3%, 4%, 5% decline after a 60% run-up [in stocks] since March is still a pretty modest pullback."

What's next: Analysts pointed to apprehension about today's U.S. nonfarm payrolls report as a possible reason for the pullback.

  • The average estimate for the report is 1.35 million jobs added, but economists' estimates in the Bloomberg survey range from an increase of 2.1 million to a decline of 100,000, according to DRW Trading.
2. Catch up quick

The Justice Department plans to bring an antitrust case against Google as soon as this month after Attorney General Bill Barr overruled career lawyers who said they needed more time to build a strong case. (NY Times)

Advertisers are pressing for unprecedented flexibility to back out of monthslong spending commitments with TV networks. (WSJ)

House Speaker Nancy Pelosi and the White House agreed to negotiate a stopgap spending bill to avoid a government shutdown next month before the election. (Bloomberg)

3. Unreliable data is complicating the unemployment crisis
Data: Department of Labor; Chart: Andrew Witherspoon/Axios

The U.S. unemployment picture looks to be improving but it's increasingly being clouded by shoddy data, a problem that seems to be getting worse as the pandemic progresses.

What's happening: The number of Americans receiving unemployment benefits rose to 29.2 million for the latest week of data, the Department of Labor announced Thursday.

  • But the increase of 2.2 million people to the rolls was largely the result of 2.3 million people being added to the Pandemic Unemployment Assistance program in just the state of California.
  • California's total PUA additions for one week nearly doubled its total number of recipients and accounted for one out of six people receiving PUA benefits nationwide.

Keep it 💯: "The unemployment data are just incredibly problematic," Heidi Shierholz, a former chief economist to the U.S. Secretary of Labor who now serves as senior economist and director of policy at EPI, tells Axios.

  • "When I talk about how bad these data are — and they are very bad — it’s all symptomatic of ... the fact that we have disinvested in our unemployment agencies for four decades and now we are expecting them to deal with thousandfold increases in demand for their services."
  • "We set them up to fail by not investing in them in a way that means we don’t have an agile system that can quickly absorb and be flexible to deal with something like this."

Between the lines: Shierholz adds that many of the nation's unemployment systems are running on a 60-year-old computer program known as COBOL that in addition to crashing, often over- and undercounts recipients.

The big picture: While the technology is a problem and the labor market is slowly improving, "we are still in a historically bad situation," Shierholz says.

  • "It’s just at absolute crisis levels. We are slowly crawling out of a hole, but it’s a giant hole."
4. U.S. trade deficit grows to largest since July 2008

Data: U.S. Bureau of Economic Analysis via FRED; Chart: Axios Visuals

The U.S. trade balance fell to a deficit of $63.6 billion in July, $10 billion larger than the month before, and the biggest monthly deficit since July 2008.

Why it matters: The spike in the trade deficit comes despite President Trump's trade war with China and tariffs on hundreds of billions of dollars of imports from China, Europe and other countries, as well as the U.S.-Mexico-Canada trade agreement, which went into effect this year.

  • The increase between the deficit in July 2016 and July 2020 is "especially notable given the drop in trade flows related to the COVID-19 pandemic," liberal think tank Public Citizen’s Global Trade Watch director Lori Wallach said in a statement.
  • "Comparing the trade flows in the first seven months of 2019 to the same period in 2020, U.S. trade has decreased 15%."

By the numbers: The $340 billion trade deficit in the first seven months of 2020 is 12.2% higher than during the same period in 2016.

  • The trade deficit with China was $3 billion more on the month at $31.6 billion.
  • The deficit with Europe also increased $3 billion from the prior month, to $23.1 billion.
  • The July 2020 surplus in services trade was the smallest since August 2012, at $17.4 billion.

But, but, but: While much of Trump's foreign policy has seemed driven by an intolerance for trade deficits, they are not necessarily bad for the economy.

5. Chamber of Commerce notes K-shaped recovery, calls for stimulus
Screenshot from U.S. Chamber of Commerce's website.

As Congress begins to return from its fall recess calls to pass more fiscal stimulus are growing louder.

Driving the news: The U.S. Chamber of Commerce released another call to action, this time from its president, Suzanne Clark, advocating for "more support" for "industries, businesses, and workers disparately harmed by the pandemic."

What she's saying: "As a business community and a nation, we cannot allow millions of workers and broad swaths of our economy to be left behind in the COVID recovery," Clark writes.

  • "Our lawmakers deserve a lot of credit for working quickly and cooperatively, on a bipartisan basis, to provide federal relief to employers and workers in the early days of pandemic."
  • "Their work is not done."

What to watch: Clark highlights the K-shaped recovery happening among U.S. workers and industries, warning that even though tech companies and some segments of the retail industry have seen success in recent months, "For countless companies in the travel, entertainment, leisure, hospitality, and food service industries, there is no end in sight to the economic malaise."

Dion Rabouin

Thanks for reading!

Quote: “The reality is: sometimes you lose. And you’re never too good to lose. You’re never too big to lose. You’re never too smart to lose. It happens.”

Why it matters: On Sept. 4, 1981, Beyoncé Giselle Knowles, the greatest entertainer of all time, was born. She has never lost.

Editor's note: In yesterday's newsletter, I said Vince Lombardi died at age 60. He was 57.