And….Pop.
September 11, 2020
Post-Labor Day trading picked up where it had left off prior to the holiday – with markets continuing to slide on growth and valuation concerns. The tech sector in particular weighed on the broader markets resulting in the S&P 500 falling-2.50% for the week. Given tech’s unabated march higher since April, the recent twinge of uncertainty over the economy, the election, and various US/China trade skirmishes has been enough to spook the herd and coax traders to lock in profits on some of the Street’s most revered darlings-Tesla, Apple, Netflix, and Nvidia – all of which were recently trading at record highs. It was a light week for any material economic news and with a follow-on, economic stimulus bill continuing to flounder in Congress, there was little else for traders to react to other than the volatility itself. It has been a bruising couple of weeks for markets, but not at all unexpected. With major indices having now fallen below their 50 day moving average – a technical condition that increases the likelihood of additional volatility – and with us now entering the true test period on a variety of different fronts, we’d expect things to remain exciting for investors.
Used Cars Ignite Consumer Prices
Consumer prices rose for the third month in a row due largely to a surge in demand for used cars. Prices rose 0.40% in August which followed advances of 0.60% in June and July. Used cars remained the hottest ticket in town, registering their biggest spike in prices for used cars and trucks in more than half of a century, and accounting for more than 40% of the increase in the consumer price index overall. Used car prices rose 5.40% last month as we continue to see consumers adapt their consumption to isolation-type goods (non-public transport, more suburban living). The surge in used car prices should trend downwards in the coming months as pent-up demand wanes. Despite the recent trend in consumer prices, it should be noted that they are still only 1.30% higher from year ago levels. Core prices which exclude volatile food and energy prices also saw a modest 1.70% increase year-over-year.
Producer Price Gains Slow
Producer prices rose 0.30% in August, a slower pace from the 0.60% increase seen in July. Within the overall number, it was services that had the greater impact, rising 0.50% for the month. Like we saw with CPI, the recent trend is misleading relative to the bigger picture. Year-over-year, producer prices have actually decreased -0.20% overall and risen only 0.30% on a core basis, which excludes the volatile food, energy and trade services components. The timing of the CPI and PPI releases fanned some commentators’ concerns over inflation, particularly given the Fed’s new policy declaring it will let inflation rise, but the materiality of these numbers is still very minor at this point.
Layoffs Continue Amid Tough Business Conditions
Businesses continue to streamline operations amid tough operating conditions. Another 884,000 Americans found themselves filing for first-time unemployment benefits last week, unchanged from the prior week. Continuing jobless claims, or the number of people continuing to receive benefits, rose by 93,000 to 13.39 million in the seven days ended Aug. 29. That was the first increase in five weeks. The increase in continuing claims as well as still elevated level of first time claims suggest we’re seeing some moderation and perhaps a stalled labor market. This, in conjunction with the lack of action out of Congress on the stimulus bill puts consumer spending at risk and is a concern as we start heading into the holiday season.
The decline we’ve seen over the last few weeks comes as no surprise. In fact, it has been a long time coming and frankly it is welcomed. While the worst for the economy is probably well behind us at this point, we’ve needed the market to sober up to the numerous tests that still lie ahead. The first test is the consumer. With the first round of stimulus running on fumes, and the economy open but operating well below former capacity, the size and timing of the follow-on stimulus bill has always made September/October the probable juncture where the market would question the economy’s fundamentals. To that end, this week the Senate tried passing a “skinny relief bill” that failed as Democrats voted down the package on the basis that it was not robust enough. Fortunately, with rates as low as they are, conditions are still very supportive to markets but uncertainty over the consumer is becoming a bigger factor and Congress’ lack of action this week only exacerbates this concern. To a lesser degree, the election – being 52 days away – may be having a minor bearing on the market, but our sense is that it is simply exhaustion that is leading this recent selloff. Making matters worse, with many indices now having broken below their 50-day moving average, markets will likely seek conviction by either bouncing back above their average or falling to a new, lower resistance level. Either way, we believe we’re going to continue to see some big moves – up and down – through the Fall or until it becomes clear a vaccine is a sure thing.
The Week Ahead
The Federal Reserve takes center stage in its first FOMC meeting following the central bank’s August announcement it will tolerate more inflation in an effort to boost economic growth. Traders will also be taking the pulse of the consumer with the release of August’s retail sales results.
A Hurricane by Any Other Name
This year has been unlike any other, and it seems fitting that hurricane season is following suit. In May 2020, the forecasters with National Oceanic and Atmospheric Administration (NOAA) Climate Prediction Center, a division of the National Weather Service, predicted that this year’s hurricane season was likely to be a very active one. Turns out, they were right. Typically, there are just 12 named storms in a season. We passed the statistical peak of the season yesterday, and there have already been 17 named tropical systems in the Atlantic basin. Meteorologists are predicting up to 25 this year.
The Atlantic hurricane season lasts from June 1st to November 30th and covers the Atlantic Ocean, Gulf of Mexico, and the Caribbean Sea. Hurricanes form over warm ocean waters near the equator. The warm, moist air above the ocean surface rises, and the surrounding air swirls in to take its place. As the warmed, moist air rises and cools off, the water in the air forms clouds. The whole system of clouds and wind spins and grows, fed by the ocean’s heat and water evaporating from the surface, creating a continuous cycle that rotates with the orbit of the Earth.
When the wind speed reaches 39 miles per hour, it is called a tropical storm. It develops into a hurricane when wind speeds reach 74 mph or higher. In the South Pacific, hurricanes are called typhoons, and in the Indian Ocean, they are called cyclones. Storms were originally designated by a system of latitude-longitude numbers, and a formal practice of naming storms began in the 1950s as a way for meteorologists to more clearly communicate with each other and the public when tracking the development and the paths of multiple storms.
The names that are given to tropical storms and hurricanes are determined years in advance by an international committee of the World Meteorological Organization (WMO). The list of names is alphabetical and alternates between male and female, starting with “A” every season. At one point in history, only female names were used. There is a unique list of names for each of six years and for each of five different hurricane regions that is then repeated every seventh year. The list does not contain names for all 26 letters of the alphabet: Q, U, X, Y and Z are skipped due to very few names beginning with these letters. In the case of a particularly deadly or damaging storm, that storm’s name is retired and replaced with a different name starting with the same letter. After the last name on the list is used, the storms are then named using the 24 letters in the Greek alphabet, starting with Alpha, followed by Beta, then Gamma, and so on. In addition to being named, hurricanes are also rated based on their strength using the Saffir-Simpson Hurricane Wind Scale: Category 1 with winds 74 to 95 mph (minor damage), Category 2 with winds 96 to 110 mph (extensive damage – can uproot trees and break windows), Category 3 with winds 111 to 129 mph (devastating – can break windows and doors), Category 4 with winds 130-156 mph (catastrophic damage – can tear off roofs), and Category 5 with winds 157 mph or higher (the absolute worst and can level houses and destroy buildings).
The Atlantic hurricane season is on pace to surpass the list of 21 names on the WMO’s list for only the second time in recorded history. The last time this happened was in 2005. That year saw a record-breaking 27 named storms including six Greek letters. For comparison, there were 18 named storms in 2019.
As of yesterday, the remaining names on the 2020 list are Sally, Teddy, Vicky, and Wilfred. Paulette and Rene are being tracked currently over the Atlantic Ocean, and we may find ourselves tracking the 2020 version of Alpha.
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