Jul 7, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙 “Frank Bench’s bakery increased its bread sales by 2,000 percent in two weeks." - See who said it and why it matters at the bottom.

1 big thing: Wall Street is no longer betting on Trump

Illustration: Sarah Grillo/Axios

Betting markets have turned decisively toward an expected victory for Joe Biden in November — and asset managers at major investment banks are preparing for not only a Biden win, but potentially a Democratic sweep of the Senate and House too.

Why it matters: Wall Street had its chips on a Donald Trump win until recently — even in the midst of the coronavirus-induced recession and Biden's rise in the polls.

  • The shift is the latest indicator of how quickly the political and business worlds have aligned in the view that President Trump is unlikely to win a second term as COVID-19 infection numbers have spiked again and the economy looks to be stalling.

By the numbers: A Citigroup poll of 140 fund managers released last week found that 62% expect a Biden win, compared to 70% who expected a Trump victory in the same survey in December.

  • And, according to Kace Capital Advisors managing director Kenny Polcari, "Talk of a Democratic sweep [is] now common" among investors.

The impact: Biden's proposed policy reversals from Trump, combined with a historically liberal Democrat-led House and Senate, could impact every corner of financial markets, from tech, chemical and health care companies' stock prices to oil futures, private equity investments and the value of the U.S. dollar.

What we're hearing: "We’re looking for higher taxes," Stephen Gallagher, U.S. chief economist at Société Générale, tells Axios, noting that a Biden win now looks "more and more certain."

  • "In the first two years of the Trump administration the markets were very focused and driven by the tax cuts and the anticipation of what that does for after-tax corporate profits and the overall impact on the economy."
  • "Now we have to position ourselves to look for some reversal of that."

Yes, but: U.S. stock indexes had been closely tracking Trump's re-election chances, especially the tech-heavy Nasdaq, which rose as Trump's poll numbers and betting odds improved, but have lost interest of late.

  • The Nasdaq is up 9% and the benchmark S&P 500 has risen 4% since June 1, during which time betting odds have moved from a 2-point spread in favor of Trump to a nearly 20-point spread for Biden, according to the RealClearPolitics database.

Thanks to the unprecedented action of global central banks, tax rates may not matter that much, notes Ellis Phifer, managing director of fixed income research at Raymond James.

  • In fact, "with global central banks and governments at the ready to add to the 'liquidity,' there may just be enough to go around to push risk markets ever higher."
Bonus content: The importance of taxes

Since 2016, Trump's lower taxes for corporations have facilitated record stock buybacks and high dividend payments, which have been a major boon for stock prices as the Federal Reserve has kept U.S. interest rates at close to 0%.

The big picture: It's not just a reversal from Trump. If implemented, Biden's proposed tax hikes on individuals, corporations and financial market gains would be the most significant since Bill Clinton.

  • "[S]table and/or falling capital gains, dividend, individual and corporate tax rates for much of the past two decades have been an under-appreciated boost to stock prices," Michael Arone, chief investment strategist at State Street Global Advisors, said in a recent note to clients.
  • Reversing that trend "could complicate the outlook for future stock returns."
2. Catch up quick

TikTok plans to pull its social video platform out of the Google and Apple app stores in Hong Kong amid a restrictive new law that went into effect last week. (Axios)

The SBA released a partial list of Payroll Protection Program recipients that included businesses owned by members of President Trump's cabinet, political groups and news organizations, among others. (CNBC)

Beijing's new coronavirus cases fell to zero for the first time in 26 days and a new poll showed China's second quarter GDP is expected to have expanded 1.1%. (Nikkei)

Amazon's stock price rose above $3,000 for the first time, with shares gaining nearly 6% on Monday and reaching a record high of $3,057 as the Nasdaq also touched a record. (Bloomberg)

3. The myth of closing the racial wealth gap with financial literacy

Adapted from the Cook Center on Social Equity; Chart: Naema Ahmed/Axios

A recent CNBC article suggests financial literacy is the "critical link" that could "help bridge America’s racial wealth gap."

Reality check: Increased financial knowledge is likely to help improve the lives of individuals, however even widespread increases in financial literacy would do little to close the racial wealth gap.

  • According to a recent study by McKinsey, Black Americans can expect to earn up to $1 million less than White Americans over their lifetime.
  • White Americans have significantly higher wealth at every income level than Black Americans, as seen in the chart above.

What it means: The focus on financial literacy generally points to disproportionate use of services like payday lending and check cashing stores with fees and interest payments much higher than traditional lending or banking options by Black folks.

  • However, a 2017 report from the St. Louis Fed points out that the idea that Black people have less wealth because they opt to use such services gets the causal correlation backwards.

What they're saying: "[M]eager economic circumstances — not poor decision making or deficient knowledge — constrain choices and leave asset-poor borrowers with little to no other option but to use predatory and abusive alternative financial services."

Similarly, the report finds the notion that Black families are poorer because they have more "unsecured debt" — defined as store bills and credit card debt, loans from a bank or credit union, and “other” types of debt — is untrue.

  • Researchers found no significant difference in the value of Black and white family unsecured debt holdings.
  • The only category in which there is a statistically significant racial difference in unsecured debt is the "other" category that includes student loans and debt for medical care.
4. Rising coronavirus cases pause economic recovery

Given the reporting lag for most traditional economic indicators, investors have turned to real-time data to assess the U.S. economy. Almost all of which show business activity stalling or declining.

What's happening: Economists at Jefferies write in a note to clients that their in-house economic activity index has "flat-lined" and "has now been moving sideways for the past three weeks."

  • "The loss of momentum is broad-based, spanning small business activity, discretionary footfall, restaurant bookings, traffic congestion, and web traffic to state unemployment portals."
  • "Regional data show particular weakness in virus-hit states, where V-shaped recoveries are morphing into Ws."
  • "Given the timing of the hit, official June data are likely to be spared, but there is clear downside for July data."

The big picture: The coronavirus pandemic appears to be worsening in larger portions of the country, Goldman Sachs economists write in a note to clients.

  • States with more than half the U.S. population now meet just one or none of the CDC-recommended gating criteria for reopening — established benchmarks, such as 14 days of fewer COVID-19 cases and fewer people with symptoms.
  • CDC guidelines propose the use of six gating indicators to assess when municipalities should move from one phase to another.

Yes, but: The increased detection of these COVID-19 cases lowers the probability and severity of any second wave of infections, researchers at Bank of America note.

  • University of Washington's IHME model estimates daily new infections peaked at 243,000 on March 23, but there were so few test kits available that only 8% were detected, according to BofA.
  • Currently the IHME model suggests there are about 69,000 new daily COVID-19 infections in the United States.
  • "Because testing is becoming increasingly plentiful and sophisticated ... more than half those daily infections are now being detected."
5. "Hamilton" is a streaming hit
Data: Google Trends; Chart: Andrew Witherspoon/Axios

Axios' Sara Fischer and Neal Rothschild write: The debut of "Hamilton" on Disney+ Friday sent downloads of the app soaring over the weekend.

Why it matters: With theaters closed until 2021, "Hamilton" is the biggest litmus test for whether Broadway will ever be able to successfully transition some of its iconic hits.

By the numbers: Users, eager to finally watch the 11-time Tony-winning show from the comfort of their homes, helped account for a 74% increase of Disney+ app downloads in the U.S. compared to the average four weekends in June, per data from Apptopia.

  • Around the globe, the app was downloaded 47% more than the average four weekends in June.

Between the lines: Google Trends data indicates that interest in downloading ESPN+ when "The Last Dance" was released April came nowhere close to the Disney+ surge this weekend.

Read the full story.

Dion Rabouin

Thanks for reading!

Quote: “Frank Bench’s bakery increased its bread sales by 2,000 percent in two weeks."

Why it matters: On July 7, 1928, sliced bread was sold for the first time using a machine invented by Otto Frederick Rohwedder. The first commercial sale happened at Frank Bench's Chillicothe Baking Co.

If you've got nothing better to do, read the full story of how a newspaper editor found the 1928 story about Rohwedder's bread slicing machine and put Chillicothe, Missouri, on the map.