By Kevin Taylor
As usual, the U. S. economy continues to present a volatile and mixed picture that makes forecasting difficult. If you’re a glass half full kind of person, you might be encouraged by the following:
- Retail sales – jumped sharply, increasing by 17.7% in May after a decline of 14.7% in April. Auto sales were stronger than expected and increased driving and slightly higher gasoline prices increased fuel sales. These trends are likely to continue as more states exit the “lockdown” due to the COVID-19 crisis.
- Foreign trade – surprisingly, despite the pandemic, our trade with other nations was virtually unchanged in the first quarter – a deficit of -$104.2 billion. As a share of GDP, the current account deficit increased slightly to 1.9%.
If you see the glass as half empty, you’d probably concentrate on these data points:
- Employment – it was another week when initial jobless claims exceeded a million, undermining the enthusiasm of May’s job report, which showed a big gain. What’s worrisome here is the fact that the federal salary supplements will run out in July unless the Congress decides to extend them. Political bickering is likely to pick up as we near the November elections.
- COVID-19 – many states are seeing a spike in cases (and deaths) as they open their economies with various restrictions. It will be doubly disappointing if they have to reintroduce limits on commercial activity.
So, pick your poison. The economy is gradually pushing through a rough patch, but it will really surge later this year or in 2021 when we get a vaccine to control the virus. Or, health care issues and permanent job losses will put a lid on economic growth as far as the eye can see.
Financial markets continued their upward path last week as the end of the second quarter came into view. All three of the major indicators were positive for the week, but the Dow and the S & P 500 were still negative for the year so far. The tech-heavy NASDAQ Composite was solidly into double-digit returns for the year.
DOW JONES INDUSTRIALS +1.04% LAST WEEK
YEAR TO DATE
S&P 500 +1.86% LAST WEEK
YEAR TO DATE
NASDAQ +3.73 % LAST WEEK
+10.85% YEAR TO DATE
Valuation metrics are increasingly high, adding more than a full point to the P/E ratio for the S & P 500 for the week and almost two points from where it was at the beginning of 2020. At Friday’s close, the S & P 500 was at 27.4 times trailing twelve-month earnings, far above its historic average in the mid-teens. While stock prices rose, interest rates barely moved which is likely to be the case moving forward as the Federal Reserve has announced plans to keep short-term rates low through 2022. This is a disappointment to yield-hungry savers, but good news for borrowers, especially mortgage borrowers and lenders.
Another worrisome factor is the high percentage of the market’s gains that are due to a few, mainly technology, companies. Nicknamed the “FAANG” stocks (Facebook, Apple, Amazon, Netflix, and Google), these stocks have done most of the heavy lifting in share prices. It would be more comfortable if the gains were more widely spread around. Oil and gasoline prices moved higher as more people were traveling to work and for personal reasons. That’s likely to continue increasing as states come out of “lockdown.”
The U. S. dollar has been surprisingly steady lately, compared with the Euro (€). That probably explains the calmness in our trade balance, discussed above. Any change in the severity of the global pandemic could upset that cart at any time, however.
We hope you find this information useful. Have a safe and productive week and, as always, if you have any questions or concerns please give us a call.