- Scott Poore, AIF, AWMA, APMA
It's Like Groundhog Day, Except We're In August
I feel like Bill Murray in the movie "Groundhog Day" as we sit here a year and a half removed from the start of the pandemic and we don't seem to have learned much from the past 18 months. They say history tends to repeat itself, well, we may be on permanent repeat if policy makers have anything to say about it. Investors need to look back at markets last year to get a glimpse into what to do this year. Let's get into it...
Is the Bond Market Trying to Tell Us Something? The yield on the 10-year Treasury has steadily declined since hitting a peak this year on March 19th of 1.74%. The chart below shows how the bell weather bond never quite reached the pre-pandemic level of 1.94%. What is the bond market trying to tell us? Initially, the bond yield began to decline as vaccination rates were climbing in the U.S. faster than other developed economies, drawing foreign buyers to our bonds. However, since July 10th, when COVID cases started to rise in the U.S. due to the Delta variant, the yield on the 10-year began to plummet - dropping 19 basis points. Cases since the 10th are up 327%, while the yield on the 10yr is off 14%. Our view is that the Best Case Scenario is that the bond market is telling us growth may slow temporarily. Our Worst Case Scenario is that the bond market is foretelling future lockdowns and COVID restrictions. At this point, given the economic data and corporate earnings, we would hold to the former scenario. However, as Samuel L. Jackson once famously said in "Jurassic Park," "Hold on to ya butts." Policy makers appear ready to do whatever they can to repeat the mistakes of the past (more on that later).
Economic Data Mixed This Week. The economic releases have been full of drama this week. Vehicle sales are down - no shock there as dealerships are still low on inventory due to chip shortages. The ISM Manufacturing Index was off a little, coming in at 59.5 instead of the 60.9 reading expected. However, a reading above 50 is typically associated with economic expansion. By contrast, the Markit Manufacturing Index final number came in at 63.4, slightly above expectations. In addition, the Markit Services Index and the ISM Services Index both were higher than expected. Yesterday's ADP report was a shocker as only 330,000 new Private jobs were added in July. More than 600k new jobs were expected. This makes today’s Jobs Report all the more important. The report just released shows 943,000 jobs were added in July versus the 870,000 expected. The unemployment rate dropped to 5.4% versus 5.7% expected. Hourly earnings increased 0.4% versus 0.3% expected. Does the market cheer this number as continued economic improvement or fret impending tapering?
Meanwhile, on Thursday, Jobless Claims were lower for the 2nd consecutive week, basically matching expectations. Last week's number was also revised lower, showing claims to have declined in 13 of the last 17 weeks. According to a report from Challenger, Gray & Christmas, job cuts announced by U.S.-based employers fell 7.5% to18,942 in July, the lowest since June 2000. Factory Orders were also higher than expected in June, which shows manufacturers are trying to keep up with U.S. consumer demand. Again, we would support the view of a Best Case Scenario that we're experiencing a slowdown in growth (similar to the Fall of 2020) and not a return of full lockdown measures - however, we would not rule out the failure of policy makers to learn from mistakes of last year. As a backstop, the National Financial Conditions Index remains stable, showing that a temporary slowdown would not derail the economic progress.
What Does the COVID Data Tell Us? The pundits have opinions on COVID and the public entertains these views because this virus has become politicized and is polarizing. What one has to do is step back from the emotions - similar to how we suggest investing - and look at the data. First, the Delta variant has proven to not be as strong as the original strain. While it might be more infectious, deaths are not following the same track as cases (as was the case in the Fall of 2020). The chart below shows that while COVID deaths have increased, over the same number of days (62) when compared to the Fall, deaths are still far less today than the surge of last year. Second, despite reports of hospitals being "overrun" with COVID cases, that's not the situation nationwide. In fact, there are more non-COVID ICU beds occupied today than there were last Fall (another policy mistake we'll touch on later). Compared to last Fall, there are 35% fewer COVID ICU beds occupied today relative to the surge last year. Lastly, there is some evidence that we can expect COVID cases, especially involving the Delta variant, to peak out in the coming weeks. Some of the states hardest hit by the recent increase in Delta cases are seeing some abatement, which could indicate a coming peak. In FL, TN, MO, LA, & AR, the effective reproduction rate (seen in the chart below) appears to have peaked and is cycling down. Texas is the exception. The reproduction rate in Texas does not appear to be rising substantially and could be peaking, but has not rolled over yet like the aforementioned states.
In addition to the charts being an indication of a peak in cases, we can also look at the U.K. which struggled with the Delta variant. In the U.K., daily cases made their lowest point on May 1st of this year. From there, cases steadily increased until peaking out at 54,183 on July 17th. However, though cases increased exponentially, it never got to the previous peak on January 8th of this year. Since July 17th, cases have dropped 46%. Here in the U.S., we hit the low mark of 7,876 daily cases on June 20th, about a month-and-a-half after the U.K. Therefore, if the U.K. peaked on June 17th, we should be getting close to peaking here in the U.S. if the 1.5 months lag time holds true. What other correlation is there? Well, the U.K. is one of the top developed countries for percentage of the population fully vaccinated (57.9%). The U.S. is not far behind at 50.5%. Yet, the U.S. had a higher percentage of infections (11% of the population - documented) than the U.K. (8% infected - documented). This would indicate a similar percent of the population of each country with COVID antibodies. It's a fair assumption that the U.S. could be getting close to a peak in COVID/Delta variant cases, so reinstituting mask mandates and/or lockdowns is probably being implemented at exactly the wrong time. Shutting down the economy due to a rise in cases would prove harmful to an economy still recovering from faulty policy decisions of 2020.