May 29, 2020
The continuation of positive medical news in the war against Covid-19 managed to push the S&P 500 above the 3,000 mark this week. Biotech company Novavax joined the growing list of drug companies racing to develop a coronavirus vaccine, announcing it has started Phase I clinical trials and has enrolled the trials’ first participants. Preliminary results are expected in July. The market’s thrust over the past two weeks has come on otherwise light economic data as the market continues to find solace in data that is better than expected. Continuing jobless claims, which represent individuals who have been collecting unemployment benefits for at least two weeks plunged by nearly 4 million to just over 21 million. The decline suggests the jobs market is beginning to rebound as states re-open their economies and businesses rehire workers. The week’s other reports on new home sales and durable goods provided some encouraging signs for the economic recovery as well. For the week, the S&P 500 added 3.01%, placing it just 10% below all-time highs.
Green Acres is the Place to Be
The coronavirus pandemic has given would-be homebuyers an incentive to ditch the hustle and bustle of urban life for the burbs. New home sales rose 1% in April, bucking estimates for a -22% decline. A -8.5% decline in home prices from a year ago, along with low interest rates, positively impacted home affordability as the median price of a newly built home settled at $309,900. Higher builder incentives and a shift in the mix of types of homes sold helped push prices lower during the month. Surprisingly, homes priced below $300,000 sold more than those priced above $500,000, suggesting middle class consumers are holding up relatively well during the pandemic. With a 6.3-month supply of newly built homes compared to a 4.2-month supply of existing homes, builders appear to be confident that demand will remain strong during the summer sales season and as homebuyers look likely to choose to shop for new homes more so than owner-occupied homes while the pandemic remains.
Durable Goods Plunge in April
U.S. durable goods orders fell -17% in April, slightly better than economist estimates of a -18.20% decline. A key measure of business investment known as core orders fell -5.8%, besting forecasts for a -15.40% drop. The decline in overall durable goods was impacted strongly by a -47.30% decline in transportation equipment as the world’s airlines have been largely grounded amid global lockdowns, reducing demand for airplane orders. Although transportation equipment will continue to be a drag on the top line durable goods figures as the airline industry struggles to take off amid continued weak passenger demand, the industrial sector looks poised for a strong rebound as the global economy reopens and factories get back to work.
Market bulls managed to pick up where they left off on what was a shortened trading week. Although hitting the 3,000 level on the S&P 500 is purely psychological, it does show how far the market has come in such a short amount of time, roughly 36% higher from its March 23rd lows and standing within 10% of its all-time high. Given the sharp rally, many investors have questioned the growing divergence between the fortunes of Wall Street and the pain on Main Street. It’s an important question, but in reviewing the most recent personal income and spending figures helps clarify what the market is seeing. The Commerce Department’s data for April showed that while wages and salaries have declined by approximately $1 trillion since the beginning of the year (on a seasonally adjusted annualized rate) that this has been more than offset by the $3 trillion in stimulus and unemployment payments. At least so far as April is concerned, personal income actually rose 10.5%. At the same time, spending on goods and services has declined by $2.75 trillion (again on an annualized basis), meaning that net saving has actually increased substantially by approximately $4.75 trillion as the U.S.’ personal savings rate hit 33%! In some ways this is completely misleading since it is a snapshot of the aggregate household balance sheet taken right after a huge “bonus” is cashed, but the data does show just how flexible households were in adjusting their consumption (somewhat by choice and somewhat by the simple reality that quarantine prevented consumption) in the wake of the economic uncertainty and how much the stimulus has done to bolster individuals’ financial health. This savings is a huge source of stored or potential economic energy. The question now is whether the coronavirus lingers, resulting in that energy being dripped into the economy and eventually running dry, or whether the economy safely reopens over the next six weeks in which case you might want to buy a neck brace to avoid the whiplash. As it stands, Wall Street has placed a big bet that this time frame will be compressed, and Main Street is still going to have a little left in the kitty to go out and blow in order to kickstart summer.
The Week Ahead
Traders will be pouring over the latest jobs, manufacturing, and services reports.
The Race to Space
Earlier this week, SpaceX was set to launch two NASA astronauts into orbit from the Kennedy Space Center in Florida. Unfavorable weather conditions resulted in the launch being scrubbed, but another attempt is planned for tomorrow, Saturday, May 30th.
SpaceX is the private rocket company founded by Elon Musk in 2002. The entrepreneurial firm based in California received funding from NASA in 2014 to create a spacecraft capable of safely transporting astronauts to and from the International Space Station (ISS). The partnership has allowed SpaceX to develop its Falcon 9 rocket and the Crew Dragon capsule that are being used in the mission.
A successful launch tomorrow would mark the first time that U.S. astronauts have been launched from American soil since the final flight of the space shuttle program in 2011. NASA has been paying Russia to use their Soyuz spacecraft to shuttle astronauts into space over the past decade. It would also be the first time a private company has launched humans into orbit and the first time to use a commercially built crew capsule and rocket. Oh, and SpaceX also designed the new space suits, too.
This week’s SpaceX flight was called off just 17 minutes before lift-off. NASA astronauts Bob Behnken and Doug Hurley were already on board and officials had conducted final reviews. Thunderstorm clouds and a strong electric field in the skies above Cape Canaveral led to the mission being scrubbed, and it has been reported that it may have been cleared just 15-20 minutes later. The window to launch is extremely narrow because of the fast-changing position of the ISS. The ISS orbits about 250 miles above Earth and travels more than 17,000 miles per hour. The launch has to happen when the space station is more or less flying over the launch site so the spaceship can use less fuel. The fuel is chilled to close to freezing and loaded just before take off to maintain its optimal temperature. Given these factors, the spacecraft needs to stay on an extremely precise launch schedule.
Furthermore, if the rocket misfires and the capsule needs to use its emergency abort system to jettison the astronauts to safety in the ocean, stormy weather and rough seas would make an emergency rescue difficult.
The 45th Space Wing, an arm of the U.S. military that oversees all East Coat rocket launches, has been monitoring a massive stretch of the Atlantic Ocean all the way to the coast of Ireland. As of Friday morning, it predicts about a 50% chance of the weather holding up enough for launch on Saturday. The odds are slightly better — about a 60% chance — for the next opportunity for liftoff on Sunday, May 31, at 3:00 p.m. ET.
Behnken and Hurley are expected to reach orbit in about eight to 10 minutes. The capsule should dock with the ISS on Sunday, and the astronauts will remain on the space station for up to 110 days before returning to Earth.
Space fans who have waited a decade for this milestone will be able to watch the broadcast on NASA’s website here beginning Saturday, May 30th, at 10:00 a.m. Central. NASA will provide continuous coverage through the mission’s arrival at the ISS on Sunday, May 31st. Docking is set for 9:29 a.m. Central on Sunday. NASA will also stream the launch online via their YouTube channel and Twitter.