This quote on Bloomberg today caught my eye. It may be a crucial explanation for why the market is so unfazed by the possibility that the Federal Reserve might announce a schedule for paring back its $120 billion in bond purchases either at next week’s central bankers speech fest or at the Fed’s own mid-September meeting.
Initial unemployment claims at regular state unemployment programs doped to 348,000 for the week ended August 14. That’s down from a revised 377,000 in the prior week and below the 364,000 projected by economists surveyed by Bloomberg. The four-week moving average for new climbs fell by 19,000 to 377,750. The drop was the fourth straight weekly decline and took the weekly number down to the lowest level since March 2020. Just for reference, though, new claims for unemployment averaged 200,000 a week before the Pandemic.
Very little mystery about what sent stocks lower today, August 18. As of 2:10 p.m. New York time the Dow Jones Industrial Average was essentially flat for the day with a tick down of just 0.05%. By 2:16, after the release of minutes from the Federal Reserve’s July 28 meeting the index had dropped to a loss of 0.44% on the day. The downward trend continued to the close with the Dow off 1.08% on the day (or 382 points) and the Standard & Poor’s 500 lower by 1.07%. The NASDAQ Composite was down 0.89% and the NASDAQ 100 closed off 0.97%. The small cap Russell 2000 index lost 0.84%. The iShares MSCI Emerging Markets ETF (EEM) gained a scant 0.16%. So what in the minutes spooked stocks?
Retail sales dropped 1.1% in July, the Commerce Department reported today, August 17. Sales of furniture, sporting goods, building materials, cars and auto parts were all down strongly in the month. Sales at non-store retailers, which include e-commerce sales, dropped 3% in July.
A report in this morning’s Wall Street Journal concludes that Federal Reserve officials are moving toward agreement on a timetable that would see the central bank begin scaling back its easy-money policies in about three months if the economic recovery continues.
Will the Delta variant surge lead to lower than expected revenue and earnings in the third quarter as consumers pull back? It’s an important question with stocks near all-time highs. Right now it looks like U.S airlines might be the early “canary in a coal mine” indicator of danger.
The Consumer Price Index climbed 0.5% in July. That was in line with Wall Street expectations. And down from the 0.9% gain in the inflation index reported for June. That was enough to send stock prices higher as investors and traders decided the data supports the Federal Reserve’s view that the recent spike in inflation will be temporary. Year over year the New Consumer Price Index is up 5.4%, a 30-year high.
The $1.2 trillion infrastructure bill that the Senate passed today–roughly half of that represents new spending–still faces a tough go in the House of Representatives where progressive Democrats have criticized the measure as light on dollars to fight global climate change. That spending has been pushed into a second infrastructure bill, which would also include money for expanding Medicare and improving access to childcare among other “social” infrastructure spending, which the Senate actually took up today. Most political pundits think that efforts to pass a “social” infrastructure bill using reconciliation will be enough to secure all the votes needed to pass the traditional infrastructure bill in the House. The bill passed today would include more than $110 billion to replace and repair roads, bridges and highways, and $66 billion to boost passenger and freight rail. The plan includes an additional $55 billion to address problems in the U.S. water supply such as continued use of lead pipes despite conclusive evidence that lead in water pipes leads to cognitive impairment in children. It allocates $65 billion to modernize the country’s power grid and $7.5 billion to build out a national network of electric-vehicle charging stations. The bill earmarks $47 billion to respond to wildfires, droughts, coastal erosion, heat waves and other climate crises.
Today I’m going to give you some picks and some rules for finding more candidates for the middle bucket, the 5-year bucket. In terms of the mechanics of a three-bucket income investment system, this middle bucket is critical since it the mechanism for turning the price appreciation of the long-term bucket into the cash income of the short term bucket. And it has to accomplish this task without taking on inordinate amounts of risk since a five-year holding period doesn’t allow a lot of time to recover losses from mistake.
This morning the Labor Department released its July jobs report. It showed a gain in non-farm payrolls of 943,000 against 938,000 in June and the 865,000 projected by economists surveyed by Bloomberg. The headline unemployment rate fell to 5.4% from 5.9% in June and a projected 5.7%. But there are good reasons for reading these numbers with even more care than usual.
I wouldn’t call it the consensus yet, but financial market thinking seems headed toward a belief that the end of the Fed’s $120 billion a month in purchases of Treasuries and mortgage backed assets won’t be a big deal. Certainly not enough to upset the bond market or produce another temper tantrum. The belief hinges on forecast of demand and supply that sees them roughly in balance even after the Fed stops its buying. An end to Fed purchases would be a significant hit to demand. But it looks like the U.S. Treasury will be cutting back on bond auctions as about the same time. And that would leave demand and supply roughly where they are now.
I’m looking for answers to two big questions that earnings from Amazon (AMZN) and Caterpillar (CAT) left us with last week. In the case of Amazon, where the company reported a slide in revenue growth after a big bump in sales due to everybody ordering everything on line during the Pandemic shutdown, the question is What is the actual sales growth trend once you remove all the plus and minuses from the Pandemic? This isn’t a question just for Amazon, of course. It’s important for figuring out the valuation of everything from Las Vegas hotel and casino play MGM Resorts International (MGM) to streaming champion Netflix (NFLX) to Starbucks (SBUX). The other question left hanging at the end of the week is whether or not we’re about to see a string of companies forecasting lower margins due to rising prices for raw materials. That was the takeaway message from Caterpillar’s (CAT) earnings report.
