Jul 28, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙"Lift every voice and sing, 'Til earth and heaven ring. Ring with the harmonies of Liberty. Let our rejoicing rise high as the listening skies. Let it resound loud as the rolling sea." - See who said it and why it matters at the bottom.

1 big thing: America's two coronavirus realities

Illustration: Sarah Grillo/Axios

The coronavirus-driven recession is creating two parallel economic realities and they are growing further apart by the day.

What's happening: Many people with financial assets and white-collar jobs have actually benefited from the economic downturn, while the rest of the country is doing its best to stay afloat.

Evidence of a "K-shaped recovery" — in which some Americans' fortunes rise while others fall — is already visible, Peter Atwater, an adjunct economics lecturer at William & Mary, tells Axios.

  • Wealthy and middle-class asset holders have retained or resumed their jobs. And the value of their assets, like stock portfolios and homes, has risen to all-time highs.
  • The average blue-collar worker or small business owner, and the half of the U.S. population not invested in the stock market, are witnessing unprecedented job losses and business closures.
  • As of Saturday, more than 20 million no longer will receive $600 a week in unemployment benefits.

Why it matters: The divergent realities are guiding policymakers as the wealthiest Congress in U.S. history has yet to pass further relief efforts despite continued urging from economists and market analysts.

The big picture: This is all happening as the U.S. labor market undergoes a long-term transition and likely consolidation, with a smaller number of bigger companies moving to automation and more decentralized technology, Wendy Edelberg, director of the Hamilton Project and a senior fellow at the Brookings Institution, tells Axios.

  • That will further benefit white-collar workers, large companies and the wealthy, who happened to also be disproportionate beneficiaries of the recovery following the 2008 global financial crisis.

On the other side: The housing market is on fire — U.S. home prices hit a record high last month with both new and existing home sales showing double digit gains while the number of Americans in forbearance programs has fallen for six straight weeks, the Mortgage Bankers Association reported yesterday.

  • That's largely because the recession is disproportionately hitting those who rent, notes Ian Shepherdson, chief economist at Pantheon Macroeconomics.

The bottom line: "Vulnerability, which we don’t naturally think of as the opposite of confidence, is what we’re beginning to see ripple through the economy," Atwater says.

  • Atwater points to a "broader sense of vulnerability" present in growing street protests in places like Portland and Chicago, but also rising xenophobia, increasing hostility toward China, and a spirit of "mounting nationalism" that is causing companies to reroute supply chains and pull back on globalization.
Bonus content: The rich stop spending, start saving

Like big businesses, wealthy individuals are now hoarding their cash. The U.S. savings rate rose to a record 32.2% in April and was at 23.2% in May. It was around 8% in February and for most of 2019.

  • That increase comes from the wealthy, as working class Americans on average have little or no savings, Joe Brusuelas, chief economist at tax services firm RSM, notes.
  • Spending by high-income consumers has fallen by nearly 10% since January, compared with a 5.3% decline by middle-income consumers and a 2.1% drop by low-income consumers.
2. Catch up quick

China continues to lag behind the pace of imports from the U.S. needed to meet the terms of the phase one trade deal, and would need to buy about $130 billion in the remainder of the year to comply. (Bloomberg)

Senate Republicans released their proposal for a fifth coronavirus relief bill, estimated to cost around $1 trillion that will include another round of $1,200 stimulus checks while temporarily lowering the $600-per-week of additional unemployment benefits to $200 per week. (WSJ)

3. The dollar's global dominance is being challenged
Data: FactSet; Chart: Axios Visuals

The dollar index fell to its weakest level since June 2018 on Monday, accelerating a slide that has put it on pace for its worst month in nearly a decade. The greenback's value against global currencies has declined by 6.4% over the last three months.

What's happening: The dollar's weakness is a reflection of the market's disillusionment with the U.S., investors say, as the Trump administration's response to the coronavirus pandemic has left much to be desired.

  • The European Union's coordinated fiscal policy response, by comparison, has boosted the euro to its highest against the greenback since 2018 and has investors expecting more losses for the dollar and gains for the euro.

What we're hearing: The dollar's dominance "is being challenged by the visuals witnessed around the globe: On top of a pandemic, the country seems to be politically unstable," Juan Perez, senior FX trader and strategist at Tempus, tells Axios, also noting the growing "Cold War" with China.

  • "Stocks are about the only positive thing that is presented to the world from here. Faith in our overall global leadership has been shaken and it’s not policy, but evidential death tolls that keep rising from a contagion others have managed to minimize to various degrees."

What's next: Bloomberg reports that asset managers have jettisoned net long positions on the dollar and taken bearish positions "as U.S. exceptionalism wanes."

  • The euro has risen 10 of the past 11 sessions, notes Marc Chandler, chief market strategist at Bannockburn Global Forex, and looks to be picking up steam as the dollar is sold against more currencies and by more investors.

Flashback: Yale University senior fellow and former Morgan Stanley Asia chairman Stephen Roach predicted earlier this year that the dollar would fall by 35% against global peers.

4. Companies are opening up future guidance in Q2 earnings

More S&P 500 companies are providing guidance on expected earnings per share as they report their second quarter earnings than last quarter, plus more are beating estimates, FactSet data show.

By the numbers: During the Q1 earnings season, 185 S&P 500 companies withdrew or did not provide annual EPS guidance, while only 100 companies provided guidance.

  • So far — based on the 128 S&P 500 companies that reported results for Q2 through Friday — 60 (47%) commented on EPS guidance for the current year.
  • Of these 60 companies, 32 (53%) said they would not provide EPS guidance or confirmed a previous withdrawal of guidance.
  • 10 companies that withdrew or did not provide guidance during the Q1 earnings season provided guidance for Q2.

Where it stands: For the Q2 earnings season, 26% of S&P 500 companies have reported. Of these companies:

  • 81% beat their EPS estimate.
  • 2% matched their EPS estimate.
  • 17% missed their EPS estimate.

This is an improvement from Q1 when 63% of companies beat earnings estimates, 5% matched and 31% missed estimates, FactSet senior earnings analyst John Butters says.

But, but, but: Earnings are expected to decline 42.4%, year over year. That's an improvement from an expected 44% decline last week but would still represent the worst quarter since Q4 2008.

5. Teaching an 18-year-old about investing
Data: FactSet; Chart: Axios Visuals

My little cousin graduated from high school earlier this year and as a graduation present I sent her $500. But I told her she had to invest it and that each quarter we would compete to see who could assemble the best portfolio. (She's very competitive.)

Where it stands: I invested my $500 in IAU, the iShares gold ETF; WFH, the Direxion work from home ETF composed of cloud computing, cybersecurity and remote communications companies; and EMQQ, the emerging market internet and eCommerce ETF.

  • She bought Prologis, a REIT that invests in logistics facilities; online marketplace eBay; retail pharmacy giant Rite-Aid; retailer Gap; and packaged foods company Conagra.

The state of play: Thanks to gold prices hitting a record high, IAU is up 6.9% this week helping my portfolio gains reach about double her portfolio despite negative returns from EMQQ and WFH.

For the record: She bought Gap because of its new partnership with Kanye West, however "not because I support Kanye but because I know that the hypebeast culture is gonna go crazy when the YZY line drops..."

The lesson: Diversification is key.

Dion Rabouin

Thanks for reading!

Quote: "Lift every voice and sing, 'Til earth and heaven ring. Ring with the harmonies of Liberty. Let our rejoicing rise high as the listening skies. Let it resound loud as the rolling sea."

Why it matters: On July 28, 1917, the Silent Parade was organized by James Weldon Johnson of 10,000 Black Americans who marched on 5th Ave in NYC to protest against lynching.

  • Johnson, a lawyer, diplomat, writer, poet and civil rights leader, was a scion of the Harlem Renaissance.
  • He wrote the poem "Lift Ev'ry Voice and Sing" in 1899 that was set to music and became known as the Black National Anthem.