This Labor Day 2020 Market Overview is going to help make some sense of what is going on in the economy as well as the stock market. While I will not provide answers to what you should do, I will instead provide information to help you make those decisions for yourself.
Keep it all in perspective! I friend of mine who is a long-term investor recently made a comment that the difference between an investor and a trader is that an investor didn’t even know the market went down lately. The moral of the story focus long term and not day to day!
Without further intro, let’s dive into the economic world and highlight a fair amount about the job market since it is the Labor Day 2020 Market Overview.
Federal Reserve Same Story Different Month
The Federal Reserve has and continues to be one of the biggest drivers of the market. You can review the Fed’s response to the Coronavirus back in March when it took action with an emergency rate cut, which virtually dropped the benchmark interest rate to zero. The benchmark interest rate is likely to stay at or near zero for an extended period.
The interest rate cut has created opportunities for homeowners to refinance and reduce their payments. The same can be said for personal loans & credit cards as most debt is tied to the Federal Reserve yield. A side note, the low rates are driving a buying frenzy in the Real Estate Market.
The losers of low-interest-rate are savers. Savers have seen their account yield drop significantly this summer to the point that savings accounts are not able to come close to inflation.
This has resulted in additional money being driven to the stock market that would otherwise be slated for savings accounts. Another way of saying that is low-interest rates are forcing Savers and investors into riskier Investments to find returns elsewhere, thus driving the market upward.
Jobs in America
With a post titled Labor Day 2020 Market Overview, how could I not address jobs? Employment is at the heart of the current economic issue as people without jobs don’t have money to spend, which hurts business. Fed chair Jerome Powell has been happy with the most recent job report showing 1.4 million Americans finding work in August.
While that is great, the US economy lost almost 22 million jobs between February and April and have only recovered half of the lost jobs. Unemployment is finally below 10% now with the latest number showing 8.4%. The bad news is these were the easy jobs to get back; it could take years to bring back the rest of the jobs, and Powell acknowledged that saying interest rates will have to stay low for years to continue to grow the economy.
Regardless of the hype, I think Fed President Eric Rosengren’s reaction to the job report best sums up the situation, and that is it’s positive; however, we remain in a very significant recession. He also said, “We already are doing quite a lot in terms of stimulating the economy, and the market understands we are not planning on raising rates anytime soon.”
The chart below from the Bureau of Labor Statistics does an excellent job illustrating the difference between COVID and the Great Recession. The unemployment rate took almost ten years to recover from the Great Recession, and the current situation is more of a “V” recovery.
My cautionary tale is that the jobs recovered now were just from businesses that were closed. The jobs that were lost will probably take years to recover as the Fed presidents have said; thus, at this point, the recovery will probably look more like we were in 2010.
Another interesting chart from the Bureau of Labor Statistics was the change in employment by sector. The government was the largest employer, but unfortunately, that was driven by hiring for the US Census, which is just temporary employment. Retail, business services, hospitality, and education all saw growth as the country has eased restrictions on these industries.
This next chart is my favorite as it highlights the temporary vs. permanent job loss. While we see numbers looking better, they seem to be a reduction in temporary layoffs, but what is concerning and not often discussed is we are seeing an underlying trend. Permanent job losers are still rising and rising faster. These are the jobs that will be hard to regain and cause lasting damage. It appears good jobs continue to be lost and the damage is worse than being shown on the news as they seem to focus on overall big numbers not the breakdowns.
A Second Stimulus Check?
There have been a few things preventing lawmakers from getting a second stimulus deal done. First was avoiding a government shutdown as Congress always seems to have something going on and waits till the last minute to kick the can down the road. The second issue is its an election year, need I explain further?
After all the rumors and debates, it appears the requirements and amounts will be the same as the last time IF it gets passed. This solution is being considered because, well, it is probably the simplest.
The more significant issue is everything else… Congress is doing what Congress does. They find a popular bill that the voters support and throw unrelated stuff into it. Let me know what you think of some of the things being added to the stimulus package and if it is COVID related or not:
- $1.75 billion to build a new FBI building
- $377 million for White house renovations and adding a screening facility
- Assorted spending on defense systems and weapons
- Repealing the $10,000 cap on state and local tax deductions
- Banking access for marijuana businesses
Should I add more? I think you get the point of why these bills are complicated by all the added agendas that are included.
Stock Market Crash 2.0 for 2020?
2020 has been a crazy year, so why shouldn’t the market be crazy too? We have seen a 34% drop from record highs which entered the start of a bear market to only turn into a roaring recovery. Historically as a long term investor, it has been proven a good move to buy equities during periods of correction. Keep that in mind and don’t fear them! Think opportunity!
One of the biggest stories is sky-high valuations, but that does not necessarily translate to a stock market crash. Price to earnings ratio or P/E is currently sitting around 33, which is exceptionally high. There have only been three occasions that the market has risen above 30:
- Right before the Great Depression
- Just before the Dot-com bubble burst
- Right before the fourth quarter swoon at the end of 2018
So valuations are high, but how about share buyback and dividends. We are witnessing the Fed putting its foot down, stopping big banks from doing buybacks, and 2020 is estimated to produce the lowest level of share buybacks in years!
Dividends have been worse as we have witnessed hundreds of companies cut or suspend their dividend in 2020, and some names on the list are substantial companies such as BP, WFC, and Ford. I won’t even talk about the airlines as they have only done one thing, and that takes on debt to survive.
I touched on stimulus money above, but that affects the market if people have money to spend or not. Additionally, support for businesses through the PPP loans or even bailouts like the airlines have been put on hold right now.
Renters not being able to pay for their properties and landlords not able to evict is also causing its own crisis. Not to mention business and personal loans and mortgages that could default. This is all a question on how many loans will default and if the US financial companies and banks have enough capital to weather the storm.
The good news is the big banks are much better capitalized than during the Great Recession, and they have continued to build reserves for expected losses quarter after quarter so far in 2020.
What caused the most recent selloff?
The tech stocks have outperformed the market by a large margin, and the problem in the market is everyone knows it! With all the capital in the market chasing the same few companies, it has resulted in driving the companies upward, which only further accelerates future investors’ desire to jump on the get rich quick train!
The past week was a shift by a large group of investors who are taking some profits from tech and rotating them to other areas such as value stocks as the market appears overvalued for certain stocks. The recent swings in the market are insane, which makes predicting the next move incredibly hard.
Berkshire & Buffet
I also have to note Warren Buffet’s Berkshire has made some moves that are attracting headlines. He is always investing in America focused as he believes America will always win the economic war! But the money trail right now appears that Buffet has concerns about the US and is hedging his risks. Berkshire is still sitting on a massive cash pile in the event of a crash but what the company is buying is even more interesting.
Recently Berkshire invested over $7 billion into all five of Japan’s biggest trading houses or “sogo shosha”: Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. Another move is investing in Barrick Gold, a mining company that follows the price of Gold.
Both of these investments show concern about holding US dollars and inflation that could result. I am not recommending you follow Buffet but take a moment to consider why he might do this and if it is justified or not. The best investor in the world is making moves that show concern about the US economy, does not give me great confidence.
Last but not least happy Labor Day! Leave a comment below on if you think the market is a bubble waiting to burst or just some adjustments and more gains ahead!
This post is my opinion, which is strictly for information & educational purposes only. The post is not intended to provide any investment advice. Please seek your own duly licensed professional for investment advice as they will be able to consider your situation. Please read my Terms & Conditions Page for a full disclaimer.