Stocks continued to move higher yesterday, once again rotating back to growth names and away from the Covid-19 cyclicals that had led the market in recent days. The primary driver remains Fed policy to keep rates depressed as long as inflation stays anywhere near 2.5% or lower. It has been sustained above that rate for almost two decades. Thus, some bulls take these inputs to mean short-term rates will remain near zero forever.
But there are two other factors to consider. The Fed actually wants to see inflation. All its efforts to pump money into the economy are an attempt to try and seed spending. Covid-19 has prevented that from happening to date. With about a fifth of the economy either still shut down or highly constrained by governmental restrictions, it is hard to spend when you don’t need dress clothes, can’t go to the ballgame, or take a luxurious vacation. While housing activity has soared, the way GDP is measured, a home purchase is an investment, not an expense. Indeed, it is investments that have taken off, reflected in higher prices for stocks, homes, and bonds.
The second factor that bears watching is the apparent flattening of the pace of recovery. While job creation continues as more of the economy reopens, the pace of net new jobs in July and August was slower than in May and June. Airline passenger totals for each of the last 10 days have been less than the week before. Although indoor dining is allowed in more and more places, restaurant interiors still look like ghost towns. For a while (May and June) retail sales were helped by pent-up demand. In some cases, demand has been very strong related to pandemic-related changes. For instance, sales of laptop computers have surged since at least half of public schools are operating virtually part or all of the time.
Many of the programs that Congress initiated to provide economic support during the crisis are now ending. As a result, workers kept on the payroll via the CARES Act or PPP loans are in danger of being laid off. $600 supplemental unemployment checks have ended.
One of the major economic trends in recent years was the widening gap between the rich and the lower and middle classes, fed mostly by record stock market values. With home prices now surging as well, courtesy of millennial demand and inventory shortages, more and more families are benefitting from the rising value of investable assets.
But for those who don’t own a home and are not active in the stock market, life isn’t getting better. Close to 15 million Americans are unemployed. The weekly jobless claim totals are now creeping back up over 1 million as the above mentioned support programs end. Without small business loans and unemployment supplements, an increasing number of Americans are once again living hand to mouth.
This column is not the place for social commentary. But for economic recovery to continue, it can’t happen if many Americans are generating less cash, either through work or transfer payments, than they were pre-pandemic. The economy won’t recover quickly if small businesses run out of either money or customers. If schools are forced to stay virtual, parents who need to work are left with unacceptable choices.
Hopefully, about two months before the election, Congress hears this. This isn’t a Republican vs. Democrat issue, it’s an issue for all incumbents seeking to be reelected. Thus, expect something in the coming weeks. Secretary Mnuchin, who works well with Nancy Pelosi, appears ready to be part of the negotiation. Mark Meadows, who led the administration’s efforts in recent weeks, was one of the leaders of the Tea Party within the House. His relation with Ms. Pelosi is hardly one that induces talks of compromise. He will still be part of any discussions, but if a deal is to happen, he probably shouldn’t be captain of the ship. The Republicans and Democrats both have to move off their soap boxes. The Republicans have to give some help to local governments, and the Democrats have to drop all their progressive add-ons that have nothing to do with Covid-19 relief. If the impact of any bill is to be felt before the election, it needs to be passed soon.
Indeed, renewed optimism about a compromise bill is probably what is lifting markets today. As long as the recovery continues and rates stay near zero, the downside risk is moderated. There are many long-term negatives to current Fed policy, but until they surface, the market can continue to move higher in a world where rates stay near zero.
Today, Mark Harmon is 69. Terry Bradshaw turns 72.
James M. Meyer, CFA 610-260-2220