Weighing the Week Ahead: Don’t Look Back!
The economic calendar is modest, and many market participants will probably extend their long weekends. The ISM Non-Manufacturing Index and jobless claims data will be the most important.
Credit for today’s theme goes to Satchel Paige, one of the greatest pitchers of all time.
Don’t look back; something might be gaining on you.
Picture Courtesy of Simpson Street Free Press, where you will also find a nice article by Patricia Cazares, age 13.
Last Week Recap
In my last installment of WTWA, I described the fragile state of the economic recovery and asked whether it could be sustained. Bloomberg apparently thinks that I was on the right track, since they ran this story on June 29th: Coronavirus Resurgence Threatens Fragile U.S. Economic Recovery. Check it out and compare the information from the three article authors with WTWA!
The Story in One Chart
I always start my personal review of the week by looking at a great chart. This week I am featuring Investing.com’s version. This is just the static chart, but a visit to the post will enable you to explore the news callouts and much more.
The market ignored record numbers of new COVID-19 cases to post a strong week. The market gained 4.0% with a trading range of 5.5%. My weekly indicator snapshot monitors the actual volatility as well as the VIX (see below).
Noteworthy
Statista tracks the current stall in state reopenings.
In my new home state of Arizona, we face possible new restrictions from Sonora. Health officials there want to restrict border crossings from our COVID hot spot into Mexico.
The News
Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!
New Deal Democrat’s high frequency indicators have always been a valuable part of my economic review. They are especially important as we all try to monitor the economic recovery. His three time frames all show some improvement – positive in the long-term, newly positive in the short-term, and “less awful” in the nowcast. NDD remains cautious about the willingness of people to accept growing cases in the pandemic.
The Good
- Pending home sales registered a blowout gain of 44.3% versus expectations of 18.0% and April’s -21.8%. (Calculated Risk).
- Consumer confidence for June came in at 98.1, beating expectations of 92.0 and last month’s 85.9. As always, Jill Mislinski has excellent coverage of this indicator as well as the best chart.
- The ISM Manufacturing Index for June registered 52.6, beating estimates of 49.2 and May’s 43.1.
- Factory orders for May increased 8.0%, better than expectations of 7.2% and much better than April’s 13.5% decline.
- More fiscal stimulus is coming – at a cost, of course.
- The Employment situation report for June showed a net increase of 4.8M jobs, much better than the expected 3.5M and May’s 2.7M.
- Unemployment declined to 11.1%, better than the expected 12.6% and last month’s 13.3%. The news looked very good, although some cautioned that the rebound still has far to go. Others wondered whether current slowing in the reopening might have an effect next month. This chart is interesting.
The Bad
- MBA Mortgage Applications declined 1.8%, but still look very healthy.
- Construction spending for May declined 2.1% missing expectations of a 1.1% gain but better than April’s 3.5% decline.
- Initial jobless claims registered 1.427M, higher than the expected 1.355M. Continuing claims were about the same at 19.29M.
- ADP’s private employment change was an increase of 2.369M versus expectations of 3.75M. May’s report was adjusted upward by over 5.8M jobs.
The Ugly
COVID-19 Pandemic Could Slash 2020-21 State Revenues By $200 Billion. Many states have not set budgets since revenue forecasts depend on income tax payments, now due on July 15th. Twenty-seven states have updated revenue projections and the picture is ugly.
Most states are constitutionally prevented from running budget deficits.
The Week Ahead
We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.
The Calendar
We have a very light economic calendar with many, no doubt, extending vacations. Jobless claims continue to be important. The ISM Non-Manufacturing Index will get attention as will the JOLTS report. Neither can really provide any fresh information. PPI is similarly uninteresting.
There is no calendar for COVID-19 news, but it will compete for attention with the economic data every day.
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Next Week’s Theme
The economic news, once again, got better, and pandemic news, once again, got worse. The market rose nicely, reassuring many investors. Instead of looking at the modest economic rebound, investors should be paying attention to Satchel Paige:
Don’t look back; something might be gaining on you.
For many reasons, our attention is currently focused on the “now” and the recent past. How can investors best look forward?
Underlying Factors
There are several important forces creating a challenge for those who do objective analysis.
Questionable Data. In normal times I depend upon economic data and earnings reports to provide a grounding for investment choices. These sources are not very helpful since none of the economic indicators mean much. Those based upon the diffusion method, including the ISM indexes, PMIs, and the various Fed indexes, tell us about the direction of change, but not the size. Survey data is good for a current snapshot but tells us little about prospects. Most other reports are distorted by extreme events related to the pandemic. The agencies creating the reports are doing an honest and unbiased job. Their tools are not geared to the extreme situations we are now seeing. I have studied both the indicators and the methodology for many years, and I do not trust the current results.
Government Intervention. Government actions have changed nearly every indicator. The Fed is active on more of the yield curve. People have income without jobs while others have jobs but low income. Special purpose loans are helping particular recipients and sectors. This is not a judgement on the wisdom of the policies. It is a factual statement emphasizing the impact on data.
Psychological Traits. Many of the most powerful are currently in evidence, creating a witch’s brew for trouble.
- Collective action. Collective goods (e.g. police, national defense, education) are underfunded when dependent upon contributions. At the moment we are reliant upon voluntary cooperation to halt the spread of COVID-19.
- Counterfactuals. People readily see and believe what is in front of them. They are not good at imagining what would have happened if circumstances were different. Progress has been made in many places at reducing the COVID-19 spread. Would the same progress have occurred without restrictions on movement and behavior?
- First-order impacts. People believe what they can see. This is why a dramatic video sways public sentiment more than years of analysis backed by data. When we see people socializing in bars or on the beach, it is tempting to think that all is well. Determining the effects of this behavior is challenging and usually ignored.
- Confirmation bias. This is the strongest of the behavioral economics effects. It affects what we see, whom we believe, and how we interpret evidence. It also affects the experts who have “skin in the game” for economic, political, or reputational reasons.
- Facts and sources. Experts often disagree. Highlighting the areas of dispute puts a shadow on findings that represent a broad consensus. Many of the most popular sources disseminate misleading information, often taking quotations out of context.
These factors interact. Why would I help someone else avoid disease if experts say it is not that dangerous? Why should I make sacrifices to fight an exaggerated public threat? Since there are significant measurement problems in identifying cases and effects, why should I believe any reported data? And why would I ever believe a model?
These effects have been fueled by a populist wave that disparages expertise of all types. We are apparently destined to learn in real time whether this particular group of experts was right.
The Result?
Stock values, the knowledge desired by many, are at the top of a pyramid. The foundation layer is expected earnings. The foundation for earnings is the economy.
Now there is a new element to the foundation – the fight against COVID-19. The economic effects will be severe if the virus spreads aggressively but can be significant even if it does not. Governments are already slowing reopening plans.
Even when businesses reopen, some customers will choose not to go.
Those dismissing the pandemic effects as unimportant are underestimating these key relationships.
As usual, I will have a little more in today’s Final Thought.
Ideas for Investors
I have decided to switch the investor section to a separate post. I hope to run it nearly every week, calling it Investing for the Long Term. In the latest edition I expanded my matrix approach for finding long-term value drawn from our most recent Wisdom of Crowds survey. As usual I linked to several of my favorite sources for investment ideas. In each case I added a comment about how I might use the idea and also related it to our Great Reset results. I hope readers will find this valuable and that my colleagues will consider the Great Reset Matrix as part of their selection process.
One of my personal 2020 resolutions was even more emphasis on investor education – not just recommending stocks but learning how to find suitable choices. I have created a resource page where you can join my Great Reset group. You will get updates about what is being studied and can join in the process. There is no charge and no obligation, but I hope you will join in my Wisdom of Crowds surveys. I need more wise participants! The latest survey results are part of my most recent report. The results of our team effort will be published on a regular basis, so you will be joining me in contributing to a greater good.
Quant Corner and Risk Analysis
I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update, featuring the Indicator Snapshot.
For a description of these sources, check here.
The C-Score remains at levels never before seen. It is combining the sharp economic rebound with pandemic effects. When we are able to separate the two, a current mission of Dr. Dieli, it will provide more guidance on the timing and extent of the recovery. I continue my rating of “Bearish” in the overall outlook for long-term investors. We should also keep watch an inflation antcipation. As this increases it affects government policy and our portfolio construction needs.
The Featured Sources:
Bob Dieli: Business cycle analysis via the “C Score”.
Brian Gilmartin: All things earnings, for the overall market as well as many individual companies. This week Brian also takes note of the improvement in corporate credit spreads.
David Moenning: Developer and “keeper” of the Indicator Wall.
Doug Short and Jill Mislinski: Regular updating of an array of indicators, including the very helpful Big Four.
Georg Vrba: Business cycle indicator and market timing tools.
Final Thought
One important issue is whether the public is emphasizing health concerns over the economy. This basic concept will be part of my next Great Reset survey.
Regardless of current attitudes, opinion on this topic will shift as we see more data.
I am concerned – for family, friends, and my readers. It is so easy to become too carefree, and we all want to get out and have fun.
I urge you to stay safe in your socializing and to be sure that your portfolio is safe as well.
I’m more worried about
- Lack of progress in seeking a balanced solution to the crisis. There is so much polarization, that finding a process for a safe reopening is getting lost.
I’m less worried about
- The election. Stories are popping up about economic and market threats from the election. I do not anticipate any outcome that would instantly alter economic prospects, but some are concerned.
I’ve always admired your “politically agnostic” economic views. However, to put up a chart by the Tax Foundation kind of blows that out of the water. I realize you put it in the “I’m less worried about” section. The chart you should put up concerning the upcoming election is the S & P for the last thirty years. Huge gains for the Dems and huge losses for the “B” team.
Jeff, Another great article;
You have asked several questions that many are asking and I would like, if I may, to share my answers to them:
1. “Why would I help someone else avoid disease if experts say it is not that dangerous?” and “Why should I make sacrifices to fight an exaggerated public threat?”
Note: [The conclusions upon which I have based my answers are conclusions that I have arrived at by studying the information we do have, and although that information is not, nor will it ever be 100 accurate, there is enough information for me to establish probabilities and arrive at conclusions that I feel confident to act upon].
My Answer: Covid 19 is highly infectious but the infection is many times more serious in certain populations, especially the elderly and those with preexisting conditions. Therefore, while a person may not be in a “high risk” group themself, there are many who are at significant risk should they contract the disease. While my precautions, (or lack of precautions), may or may not affect many people, they may directly or indirectly seriously affect someone who is “high risk” and therefore I will be happy to experience a little inconvenience if that inconvenience might keep another from serious illness or death. I would also hope that others would feel the same way about protecting me and those I love. In the Czech Republic there is a saying; “I take care of you and you take care of me”, which is just another way of saying, “do unto others as you would have then do unto you”,
2. Since there are significant measurement problems in identifying cases and effects, why should I believe any reported data? And why would I ever believe a model?
While no test, no survey, no measurement is 100% certain we learn to live with and make decisions based on probabilities. My wife is always reminding me, “you don’t KNOW that”, and so I correct myself and resatate my self saying “it is highly probable that..,” Therefore, it is highly probable that we are experiencing a worldwide pandemic that is highly contagious and affects different population groups differently. It is highly probable that far more people, (as high as 12 X), have been infected but show no symptoms of infection and therefore these infections go unreported. Therefore, it is highly probable that most of the population in our country, our states, our cities, our communities including you and I will be exposed to the infection unless steps are taken to limit chances for exposure that will lead to infection. These steps are designed to limit exposure to the virus and are based upon the most important variables in the spread of the virus These variables include: 1. proximity to a person with the virus, (social distancing), 2 exposure, (being in large groups with many chances of being exposed), 3. confinement (being indoors or other restricted space with others), and 4 airborne transmission of water droplets. Therefore, there are precautions that we all can take to reduce the chances of spreading the disease and since it is highly probable that most people who have the virus do not know that they are even infected it is important that the following precautions are taken: 1 maintain distance between yourself and others, 2 avoid large groups and gatherings, especially indoor gatherings/groups, and 3 wear a face covering. Since is highly probable that an infected person can spread the virus, either directly or indirectly, it is highly probable that the virus will spread to a person who belongs to the “high risk” population including members of your family or close friends if these precautions are not taken. Therefore, we may not have exact COVID-19 numbers, (we never will), we do have enough information come to some conclusions and to make some decisions based on probabilities. (This is the same with virtually every conclusion we come to and with every decision we make.)
A person’s life is made up of experiences and the experiences we have are largely a result of the decisions we make. A person who learn to make “informed” decisions, (decisions based on analized information), is more likely to experience the outcome that they desired. Therefore, it is logical that the better our information and our analysis the more likely, (probable) it is that those decisions will lead to the desired outcomes. However, while our individual decisions have a significant impact on our lives, very few of us live in isolation. This means that the decisions of others may well affect us as much, (and I believe probably more), than our own decisions. The four questions that were asked had one thing in common, “why should I?”. The person asking them was only concerned about themself and how their action might affect them as an individual. I would suggest that the wrong questions were being asked and that when we ask the wrong question, “it is highly probable” that we will arrive at the wrong answer. If we asked the following questions instead, I would suggest that our answers would likely be quite different:
“Why wouldn’t I help someone else avoid disease even if experts say it is not that dangerous, especially if they might get seriously ill or even die?”
“Why shouldn’t I make sacrifices to fight a public threat even if exaggerated if it means keeping someone from getting seriously sick or even dying?”
Since there are significant measurement problems in identifying cases and effects, why shouldn’t I do my own research so I have a basis on which to evaluate reported data?”
“And why would I ever believe a model that I don’t understand or that I believe to lack sufficient basis to trust?” What do I need to learn to understand and accurately evaluate a model so that I can accept it and base decisions on it or reject it.
Also, the above questions show extreme ignorance on the part of the individual asking the question. Is there any question that for some people the disease is extremely dangerous? Is there any question that a lot of people are getting sick, that may people are requiring hospitalization and that far too many are dying? If even if the “seriousness” of the disease is “exaggerated” for some, it was not exaggerated for a person spending weeks in a hospital or for the person and their loved ones who had died from it.
If a person rejects data, or a model based on that data, because it may not be 100% accurate, they really don’t understand the use of data or models in the first place which is unfortunate. To blindly reject or accept something we don’t understand is dangerous. We should ask questions and do the necessary study to find the answers.
Thanks again for the article and for giving me some real “food for thought”.
1. Edward Lunt- thanks for the great post. It is well argued and helpful.
2. Oldprof: “These effects have been fueled by a populist wave that disparages expertise of all types.”
Response: The sad fact is that this has been well earned. The financial crisis was a debacle by all of the “experts” involved. Similarly, the CDC, NIH, and many other “experts” have butchered the messaging on the response Covid. The current POTUS will take the blame (and certainly deserves some), but if you are a multi-decade “expert” aged 60-80 and make some of the most ridiculous public statements about masks not being necessary, that the virus will not be such a problem, (I could go on), what do you think the average “non-expert” will think?
I have posted on the complete butchering of the modeling enough (as a modeler in a different field, myself)- truly spectacular.
Thinking that the “populists” are just not as good at taking care of their lives as the “elites” is the definition of elitism. One set of the hoi polloi is rioting/looting, and the other is not wearing masks (and other silliness). Many/most of these people have little to lose economically by doing this- that’s precisely why it happens.
The sellout of the working class at all levels over the past 30 years is the issue. This was done by the elites in party politics (both parties for their own reasons), the major media, academics, and of course the mega-corporations (including financial firms).
Personally, I have always known that masks work (ask a medical person who has worked in a TB or flu wing of a hospital for years.) Social distancing works.
On an “economics” note, I am not sure why they did a “stimulus” by sending a bunch of checks to people who didn’t lose their job. They should give pretty generous unemployment checks instead.
Anyway, thanks for the work, Oldprof. It’s always informative.
“Resurgence of COVID-19 was predictable and was predicted after easing of restrictions by an incompetent Govt.
Hospitals ARE NOT overburdened even in Nuevo York and Shitcago. More testing of young people accounts for MOST of the up-tic of confirmed cases in these age groups, which is where we see the majority of increase.
Farrakhan may be right this time but for the wrong reasons. He is a racist nutcase.
Wall St Journal:
Some Hospitals in Southern, Western U.S. States Near Capacity Amid Coronavirus Outbreaks
Texas, Arizona and Florida have been some of the worst-hit states in recent days..
(https://www.wsj.com/articles/after-week-of-coronavirus-highs-u-s-sees-slight-drop-in-cases-for-july-fourth-11593954831)
BS.
Local Fox Station had the Health Department Head comment on the rumors.
WSJ like the WHO and CDC is spreading pure propaganda based on unsubstantiated TOTAL bed occupation numbers when MOST of the new occupations are ELECTIVE AND OTHER (CANCER) SURGERIES that were cancelled or delayed over fears of overwhelming the medical facilities with COVID-19 patients. The guy was on Tucker Carlson Tonight as well.
Sorry can’t find the video on YouTube. May have been removed by Google.