Top Weekly Themes
- The “Great Lockdown’s” Destruction. Last Thursday, the economic impact of the COVID-19 pandemic was on full display following the release of the advance estimate of second quarter gross domestic product (GDP) by the U.S. Bureau of Economic Analysis (BEA). Real GDP declined by an annual rate of 32.9% in the second quarter, and the finalized first quarter annual decline was 5%. The second quarter decline eclipses the dataset’s prior record drop of 10% reported in the first quarter of 1958. The decline was driven by weakness in almost every category, including personal consumption expenditures (PCE), exports, private inventory investment, nonresidential and residential fixed investment, and state and local government spending. This weakness was partially offset by a rise in federal government spending. In addition to the weak economic activity, the second quarter price indices also registered a decline, with the PCE price index excluding food and energy falling 1.1%. The negative change in prices could stoke deflation fears as it is the first negative recording for this index since 1959. This also means that the Fed has no incentive to tighten policy any time soon (more on that below). These are sobering numbers, but most economic indicators are pointing to an improvement in economic activity in the third quarter. However, a “V-shaped” rebound to prior economic levels seems increasingly unlikely as weekly initial jobless claims remain elevated.
- Don’t Even Think About Higher Rates. The Federal Open Market Committee (FOMC) concluded its two-day meeting last Wednesday, followed by Federal Reserve (Fed) Chairman Jerome Powell’s press conference. There were few surprises, with much of the outcome and direction as expected. The Fed left the federal funds target range unchanged at basically zero (0.00% to 0.25%) and provided a dovish message regarding monetary policy. In the FOMC statement, the Fed added that “The path of the economy will depend significantly on the course of the virus.” This statement seems obvious, but Chairman Powell acknowledged that even after a vaccine or therapeutic becomes available, it will take a long time before the labor market fully recovers from COVID-19. Regarding inflation, he stated that we will be struggling for some time against disinflationary pressures as opposed to inflationary pressures. Somewhat humorously, he repeated once again that they aren’t thinking about even thinking about thinking about raising interest rates. He used the phrase “thinking about” an extra time for emphasis.
The first takeaway is that the Fed is not only concerned with high unemployment and a lack of inflation but see both as continued concerns for at least the next two to three years. The second takeaway is that we get the sense, once again, that the Fed believes there is little more they can do but that won’t prevent them from doing more. The third takeaway is simply putting everything together in the context of the current, low interest rate environment. The Fed is obviously on hold for some time, and bond yields continue to make record lows. When looking at the federal funds futures market, investors are still anticipating the next move by the Fed will be a rate cut as opposed to a rate hike. When looking out longer term, forward guidance and asset purchases remain important policy tools the Fed can refer to when taking additional policy action. Both would likely put additional downward pressure on yields.
- Lawmakers Unite. The Chief Executive Officers of the four largest tech giants – Alphabet, Inc.; Amazon.com, Inc.; Apple, Inc.; and Facebook, Inc. – participated in a House Judiciary Subcommittee hearing last Wednesday. In what felt like the first bipartisan discussion on Capitol Hill in some time, both sides of the political aisle seemed united in their criticism of the big technology firms’ business practices and antitrust concerns. Questions from lawmakers were diverse, ranging from free expression on social media platforms to how Amazon.com handled the shipment of non-essential goods during the early days of the COVID-19 pandemic. The hearing was likely a preview of findings assembled by the House Judiciary Committee’s year-long antitrust investigation that are anticipated to be released in a month. We are not privy to what has been uncovered during this investigation, and we are also not experts in antitrust law; however, we currently do not anticipate a significant impact to our current holdings.
|Week (%)||YTD (%)||1-Year (%)||3-Year (%)||5-Year (%)||Div Yield (%)|
|Russell 1000 Value||(0.8)||(12.7)||(6.7)||8.8||29.7||2.63|
|Russell 1000 Growth||1.6||16.4||26.4||73.4||114.5||0.84|
|MSCI EM (Emerging Markets)||0.4||(1.2)||6.6||10.6||38.9||2.56*|
|Bloomberg Barclays US Aggregate||0.2||7.7||10.2||18.0||24.7||1.07|
|Bloomberg Barclays US High Yield – Corporate||0.7||0.5||4.0||14.0||32.8||5.41|
|Bloomberg Barclays Municipal Bond||0.3||3.7||5.3||14.1||22.5||1.22|
|Bloomberg Barclays Global Aggregate x US (Country)||1.5||5.2||6.5||10.9||22.3||0.69|
|Crude Oil WTI (NYM $/bbl) Continuous||(2.8)||(34.6)||(31.2)||(19.7)||(17.7)||39.9|
|Natural Gas (NYM $/mmbtu) Continuous||2.5||(16.4)||(14.4)||(37.8)||(33.9)||1.8|
|Gold NYMEX Near Term ($/ozt)||3.4||28.6||36.6||54.0||79.5||1,953.5|
|Copper Cash Official LME ($/mt)||(0.9)||5.2||9.0||3.1||23.5||6,475.0|
|1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.16||1.12||1.11||1.17||1.09||1.18|
|Japanese Yen per U.S. Dollar||107.00||108.68||108.65||110.96||124.34||105.03|
|U.S. Dollar per British Pounds||1.27||1.32||1.22||1.31||1.56||1.30|
As of July 30, 2020 (close) *Dividend Yield For MSCI EAFE and MSCI EM are from 6/30/2020.
Chart of the Week
- Unlike the ’08/’09 Global Financial Crisis (GFC), the U.S. housing market has been a source of strength so far during this economic downturn. Pending home sales in the U.S. have continued to rebound from their sharp but brief decline in the early part of the COVID-19 pandemic. In June, pending sales rose 16.6% following a substantial 44.3% increase in May as lockdown restrictions lessened and mortgage rates continued to fall.
- The swift recovery in housing has been one of the few bright spots for the U.S. economy and is hopefully reflective of households being in a healthy financial position. Since the GFC, homeowners have consistently rebuilt the equity value in their homes. As of the end of March, owners’ equity as a percentage of household real estate value has grown to nearly 65%, a level last seen in the early 1990s. In addition, the number of mortgaged residential properties with negative equity is modest at 1.8 million homes, or 3.4% of all mortgaged properties. CoreLogic, a data provider for the housing industry, expects housing prices to hold up well with an expected peak-to-trough decline of 1.5%, compared to a 33% decline during the previous recession.
- The strength in housing has certainly been a boon to many stocks tied to the industry. In BMT’s internally managed equity strategies, we hold two companies (Lowe’s Companies (LOW) and UFP Industries (UFPI)) that have produced a year-to-date total return of 25.95% and 23.83%, respectively. This compares favorably to the 1.96% returned by the S&P 500 Index. While we believe it will be difficult to maintain the strong housing outperformance going forward, the industry is better positioned to endure this crisis, especially as lockdowns continue, rates stay low, and more fiscal stimulus is passed.
 Federal Reserve System
 Returns are as of 7/29/2020
Almost Halfway There.
As we progress through the second quarter earnings season, it is important to note how results are trending compared to expectations, as well as how analysts are revising estimates for the next 12 months. As of Wednesday morning, nearly half of the companies in the S&P 500 had reported results for the second quarter, with data largely being better than feared. To be sure, it is important to remember that the absolute earnings results are still down significantly, with full year 2020 EPS expected to decline over 21% from 2019. From our own time spent on company earnings calls, we would characterize management sentiment as cautious, but reflecting an environment that, in many cases, is better than feared. This cautiously optimistic tone has started to flow into earnings expectations for the months ahead. The graph below shows a very slight improvement in earnings growth estimates for the next twelve months. However, while results have been coming in higher, company leaders remain uncertain on the path ahead, given the volatility of COVID-19 cases, upcoming presidential election, and civil unrest. Continued improvement in earnings expectations is a critical component of the market’s ability to push higher, in our view.