Falling Unemployment | Increased Homeownership | The Economy-Market Disconnect

Unemployment Rate Falls Even as US Adds Million of Jobs: U.S. employers added 1.8 million jobs in July, and the unemployment rate fell to 10.2%. So far that recovers less than half of the jobs lost due to the coronavirus pandemic. July’s job growth followed May and June’s combined payroll gain of 7.5 million as many states lifted lockdown restrictions on businesses. There are now about 13 million fewer jobs than in February, the month before the coronavirus hit the US economy.

Last month’s jobless rate showed Americans returning to work primarily in hospitality, government, retail, business services, and health care. Still, unemployment remains historically high. Pre-pandemic, the unemployment rate was hovering around a 50-year low of 3.5%.

Homeownership Rate Sees Spike in 2020: According to the St. Louis Federal Reserve, US homeownership just hit a high level not seen since July 2009. While survey distortions associated with the COVID crisis may have played a role, we believe the demand for more personal space during the crisis and a drop in mortgage rates to 50+ year lows (see below) were more significant.

Those deliberating the purchase of a second home or move to the suburbs seemed to have jumped from the fence. Corroborating the Fed’s data, Zillow recently released data showing that homes moved from “for-sale” to “pending” increased 16.1% on a year-over-year basis.

In our view, homeownership will continue to rise, potentially surpassing all-time highs, as digital platforms take the friction out of the buying and selling process. Next generation real estate platforms like Zillow and Redfin have begun to buy, renovate, and sell homes, simplifying and adding liquidity to the process.

The Week on Wall Street: Last week, the Standard & Poor’s 500 rose 2.49% along with the MSCI ACWI Index, a broad measure of equity-market performance throughout the world, at 2.09%. The Barclays Global Bond Index fell 0.05%.

Deutsche Bank: We’re Now Looking at the Lowest Government Bond Yields in Over 200 Years

Examining the Disconnect Between the Economy and the Market: Why are stock markets failing to recognize the hardships that consumers are feeling? Consider two central factors behind this disconnect.

Reason 1: Tech’s Dominance of the S&P 500

Information technology (IT) sector accounts for over a quarter of the S&P 500, 27.5% to be exact. This sector alone is bigger than the bottom six sectors of the S&P 500 combined. This inequality means the performance of the IT sector has a stronger relative impact on the index’s overall returns. Within IT, we can highlight a subset of stocks, which include some of America’s biggest names in tech:

Source: Yahoo Finance

These companies have grown rapidly over the past decade, and continue to perform strongly during the pandemic. Should this trend continue, the S&P 500 could skew even further towards the IT sector and become less representative of the US  economy.

Reason 2: The U.S. Federal Reserve

Stock prices typically reflect a company’s future earnings prospects, meaning they are influenced, to a degree, by the outlook for the broader economy. An ongoing pandemic paired with a steep decline in consumer sentiment, it is reasonable to believe that many company prospects look bleak.

In a somewhat controversial move, the U.S. Federal Reserve stepped in to counter these effects by creating the Secondary Market Corporate Credit Facility (SMCCF). This facility operates two programs which ensure businesses have access to funding during the pandemic.

Corporate Bond Purchase Program

• The SMCCF is currently buying corporate bonds from an index of nearly 800 companies. (Of the ten largest recipients of this program, five are categorized as consumer cyclical.)
• This program is intended to support the flow of credit, but its announcement in June also gave stock markets a boost in confidence. With the Fed directly supporting corporations, shareholders are being shielded from risks related to declining sales and bankruptcy.
• By the end of June, the SMCCF purchased $429 million in corporate bonds.

ETF Purchase Program

• The SMCCF is also authorized to purchase corporate bond ETFs, a historic first for the Fed. While the SMCCF’s purchase of ETFs outsize those of corporate bonds, the Fed signaled intention to make direct bond purchases its primary focus going forward.

Will Markets and Consumers Reconnect Anytime Soon? It’s hard to see the S&P 500 moving towards a more balanced sector composition in the near future. America’s big tech stocks have been resilient during the pandemic with some even reaching new highs.

The Fed also remains committed to providing corporations with credit, thereby enabling them to “borrow” their way out of the pandemic—propping up stock markets by reducing bankruptcy risk and potentially speeding up the economic recovery.

Consumer sentiment, on the other hand, has yet to show signs of recovery. 63% of Americans believe economic recovery will take more than a year, while 82% hope for an extension of COVID-19 relief programs.

Two Pharma Giants Team Up for COVID-19 Drug Therapies: Pfizer agreed to manufacture and supply Gilead Sciences’ antiviral drug remdesivir (no, that’s not a typo). This multi-year agreement will support efforts to scale up the supply of the intravenous drug shown to help shorten the recovery time of some hospitalized coronavirus patients.

There are no FDA-approved drugs for the coronavirus, which has infected more than 19 million people worldwide and killed at least 715,163 in about seven months, according to data compiled by Johns Hopkins University. Originally developed to treat HIV, doctors have been using remdesivir on COVID-19 patients. In May, the FDA granted an emergency use authorization of remdesivir, even though the drug has not been formally approved by the agency.

Planning Corner: A New Incentive to Give—and Save Receipts: The CARES Act included so many components that some of the provisions related to charitable giving were lost in the shuffle. One such component concerns deductions: for the 2020 tax year (i.e. the return you’ll file in 2021), taxpayers claiming the standard deduction can take a special “above-the-line” deduction for cash gifts to qualified charities. Such charitable contributions will help reduce adjusted gross income.

Don’t get too excited. The deduction is small—$300, regardless of tax-filing status. Neither gifts of property nor contributions to donor-advised funds qualify, but the “above-the-line” piece helps ensure many taxpayers who recently may not have claimed a tax benefit for charitable contributions may deduct some of their contributions. Since the new tax laws went into effect in 2018, fewer taxpayers have itemized their deductions. No itemized deductions, no credit for charitable gifts, which appears to have depressed charitable contributions in 2018.

Note: if you are an itemizer, you cannot claim the new “above-the-line” deduction with additional charitable contributions on your Schedule A (itemized deductions). It is either/or.