The stock market is too optimistic about a quick economic recovery
Everyone wants the global pandemic to be a short-term problem for the stock market. It will not be.
Equity markets are factoring in a V-shaped economic recovery, with S&P 500 SPX, -0.20% earnings expected to recover in 2021 to a slight increase over 2019. Better-than-expected May and June jobs reports — and record May retail sales growth — provided a boost to more cyclical and value-oriented areas.
But if the states experiencing surges of coronavirus infections are forced to reinstate restrictions on business activity, these conditions may end, fast. While much of the U.S. stock market is discounting for the perceived pandemic recovery, we believe economic recovery will be more gradual.
Volatility has remained high through the equity rebound in the face of several key uncertainties: the trajectory of the COVID-19 virus as a second wave of infections hits states that reopened their economies; the willingness of consumers to go out and spend again; the comeback in employment after massive layoffs; and the size of a potential new fiscal stimulus package.
First-quarter earnings are now meaningless. Enterprise budgets are due to be cut across the board as companies reassess revenue assumptions in a very uncertain environment.
Market prices have gotten ahead of the fundamentals, so those expecting a short-term V-shaped economic recovery may well be disappointed. The road promises to be long and challenging, the likeliest winners being patient, long-term investors willing to ride the waves.
Fox Business/Megan Henney
US budget deficit swells to record $2.81T in 10 months
The U.S. budget deficit climbed to a record $2.81 trillion in the first 10 months of the fiscal year, a record high, the Treasury Department said Wednesday.
In July, the gap between what the government spent and what it collected hit $62.9 billion, well below the $864 billion recorded in June. That was the lowest monthly figure since the coronavirus pandemic brought the nation’s economy to a grinding halt in mid-March.
Federal spending rose to more than $626 billion last month but was offset by the $563 billion the government collected in tax revenue after it extended the tax filing deadline from April 15 to July 15. That extension allowed Americans to hold onto their cash longer as they dealt with the fallout from the virus and injected about $300 billion of liquidity into the economy.
Nearly half of the outlays in July stemmed from the Paycheck Protection Program, the $670 billion rescue fund designed to keep small businesses afloat and avert mass layoffs. It accounted for about $26 billion of the government’s spending.
In total, the U.S. government has spent more than $5.6 trillion so far this year.
The deficit for fiscal 2020 is projected to hit $3.7 trillion, a record, according to a projection from the Congressional Budget Office. The current record for a fiscal year deficit is $1.41 trillion, set in 2009.
Dollar slips as U.S. stimulus stalemate persists
The dollar slid on Thursday against some major currencies such as the euro, Swiss franc, and sterling, weighed down by the impasse in Congress about additional U.S. stimulus to help cope with the coronavirus pandemic.
In the afternoon session though, the dollar trimmed its losses, as U.S. stock indexes fell.
After losing 10% of its value from a peak in March, the dollar has been bouncing around its lowest levels in more than two years since late July.
Investors, however, remained focused on the stimulus package talks, which broke down last week.
Funding for the U.S. Postal Service and to shore up election infrastructure became a major sticking point in congressional talks on coronavirus relief, as President Donald Trump vowed to block any money to facilitate mail-in voting.
On Wednesday, Trump accused congressional Democrats of not wanting to negotiate over a U.S. coronavirus aid package as Republican and Democratic negotiators traded blame for a five-day lapse in talks over relief legislation.
“The stalemate over the stimulus package is troubling,” said Amo Sahota, executive director at currency advisory firm Klarity FX in San Francisco. “Sticking more band-aid over it, which is what the administration is trying to do right now, is not enduring.”