What Effect Will Lockdowns Plus New Stimulus Checks Have On Markets This Week

Fresh stimulus and new stimulus checks to some individuals is in the works. Wall Street is begging for it.

But will an ever increasing chorus of governors calling for a return to partial lockdowns, not to mention lockdowns in Japan over the weekend, lead investors, both foreign and domestic, to cash out this week?

For now, all eyes are on the consumer. What shape are they in to keep the market going, thanks to unemployment insurance and money from the Payroll Protection Program keeping most people solvent.

Signals are now emerging that the initial boost from pent-up demand in early summer is fading. Consumers aren’t all that interested in attending theme parks and retail in masks on 90 degree days. They are staying home. Consumer confidence is slipping lower due to government enforced joykills.

That, plus market concerns about labor markets, clouds the outlook and could be exacerbated if the government does not announce its final relief bill this week. It was expected last week.

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Renewed stimulus will backstop millions of workers afloat, especially those who were told to go home again after a bring stint back in the gym, the mall, or the local restaurant.

Untold millions more are not expected to get their old jobs, according to one study by the University of Chicago published earlier in the pandemic. If true, that will be the second wave hit to consumer sentiment after the initial wave was protected people from a severe wipeout thanks to the government.

Announcements of more lockdowns, or schools opening and then reclosing, will sour Wall Street. More talk of school opening policies is expected this week. Some investors will see a political angle. But all will see an economy and a society on pause if schools in the northeast — the early epicenter and first to recover from the coronavirus outbreak — force students and teachers into hiding.

The U.S. Is Flatlining

U.S. tech companies are doing great, we learned from last week’s earnings reports. Staying-at-home was profitable for companies dependent on its end users to be plugged in as much as possible.

Sadly, the the U.S. and the world’s equity markets are not powered by Silicon Valley and IT firms.

The largest ever quarterly decline in U.S. GDP was all thanks to forced closure of businesses in the second quarter, that benefited tech companies. Consumer services, led by retail and hospitality, were crushed.

A recovery for those sectors is proving difficult due to extended lockdowns in California and New Jersey, and a recent pause on reopening in Rhode Island where the government there reduced the amount of people allowed at private parties, including outdoor gatherings.

Jobless claims and high-frequency employment survey data for July showed a worsening of labor market conditions.

“The phase four spending package remains crucial,” says Michael Gapen, an economist for Barclays in New York.

Gapen thinks U.S. economic momentum will be more subdued and uneven in the coming months.

It’s already been uneven, with tech stocks leading everything higher. The new uneven means not everything is going to go up. The coronavirus trade — which was a play on beat up stocks seen recovering from the end of lockdowns — will be volatile again this week.

The best warning signs of the coronavirus trade not yet bearing fruit came from last week’s jobless numbers. A second consecutive increase in initial claims and the substantial rise in continuing claims is as much a buzzkill for the market as is going to Disney in a surgical mask.

An unpublished, private sector survey showed that a little under 60% of workers that were laid off due to lockdowns reported being put back on payroll in June. The rest said they were not asked to come back to work yet even as lockdowns were lifting nationwide.

High-frequency data from the Census Bureau’s Household Pulse Survey (HPS) also showed a decline in employment of about half a million between mid-June and mid-July due to lockdowns and business owners simply not seeing the consumer traffic to warrant bringing back staff.

The Census survey predicted the June change in employment, whereby employment in the HPS rose 5.5 million and the increase in private sector employment in the household survey rose 4.9 million. But the direction of the HPS July data points to a deterioration in labor market conditions, two months after states reopened. The June trend has been flatlined.

The market has been ignoring this until recently.

The only thing holding the market up is the Fed and Treasury still with plenty of fire power to save the publicly traded companies, and the retirees invested in them, from a Depression-era like bloodbath.

“Fed Chairman Jerome Powell told us that the Fed is not thinking, about thinking, about thinking about — yes, he added a third ‘thinking about’ — raising rates,” says Dan Russo, chief market technician at Chaikin Analytics.

The Dow Jones Industrial Average closed lower on the week and the small to mid-cap Russell 2000 — which is heavily weighted towards companies whose sole business base is in the United States — underperformed the S&P and the Dow.

Gold is still looking golden for the week. Bonds, especially developed market debt, are looking useless.

What’s so great about gold?

California, Texas, and Florida are numbers 1, 2, and 3 in terms of population and 1, 2, and 4 in terms of GDP in the U.S. The fact that the virus is spiking in all of these states is bad news for the economy and is likely bad news for the market. A “double spike” in infections might lead to a “double dip” in the market, warns Marc Odo, client portfolio manager at Swan Global Investments.

“Traditionally bonds have been the safe harbor, but with yields at historic lows investors are looking to alternatives to fill that capital preservation role,” says Odo. Gold has been a beneficiary of this move. Trillions of dollars of new money has pushed gold to record highs.

“With bonds no longer able to provide that dual role of capital preservation and income, investors need choices,” says Odo. Hedging strategies using options have seen a lot of growth both in terms of products available and assets under management these last few years. We expect that trend to accelerate,” he says, adding that from the market’s view right now, bonds are “dead money”.

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