Senior editor Ash Bennington joins managing editor Ed Harrison to discuss market sentiment in light of NBER’s recent announcement that the U.S. slid into recession in February. Bennington and Harrison explore whether market participants are betting that liquidity will mitigate the credit cycle’s severity and whether this could be a miscalculation that catches investors off guard, leading to a “double-dip” recession. They also draw comparisons between today’s markets to that of the dot-com era, highlight the shift toward momentum trading, and share their thoughts on how durable damage to demand can bring an unnaturally elevated market crashing down later in the year. In the intro, Peter Cooper explains the surge in new online brokerage accounts and explores particular instances of excess speculation by retail investors.
Republicans’ big bet on the economy
GOP senators don’t plan to act on new coronavirus aid until next month — a decision that could backfire come November.
The United States officially is in a recession. But Senate Republicans are still in no rush to dole out more coronavirus relief.
Buoyed by a surprisingly strong jobs report last week and the knowledge that some of Congress’ $2 trillion March spending package still hasn’t been spent, the Senate GOP remains noncommittal on the timing and substance of the next piece of legislation. Bipartisan talks still haven’t begun in earnest, according to senators and aides, and the White House and senior Republican senators say they won’t start until July.
The economy has “bottomed out” said Senate Majority Leader Mitch McConnell (R-Ky.) in a floor speech as he touted improving jobs numbers. He declined to answer a reporter’s question about timing for new aid. But if the Senate waits until next month to act, the window gets smaller. After July 3, the Senate is scheduled to go on a two-week recess, return for three weeks and then depart again until September.
Republicans say it’s only responsible to wait and see how nearly $3 trillion in total coronavirus spending seeps into the economy. But it’s also a gamble: if the economic recovery isn’t as strong as they predict, they risk being blamed by voters in November that they and President Donald Trump didn’t do enough amid a global pandemic and historic recession.
“End of July … is frankly my sense of when I think we’ll have all the information we need to put the next bill together. And it might be about the time when all of the money from the [previous] bills has been spent,” said Sen. Roy Blunt (R-Mo.), the No. 4 GOP leader.
The Democratic House majority passed a $3 trillion coronavirus aid bill in May, but Senate Republicans dismiss it as a “wish list” of liberal priorities. Still, they have declined to offer an alternative vision so far and are spending this week on a public lands bill championed by Sens. Cory Gardner (R-Colo.) and Steve Daines (R-Mont.), who both face tough races this fall.
McConnell has publicly predicted talks on the next bill won’t pick up for about a month and has told Senate Republicans that he prefers to wait until after the July 4 recess to work on a package, according to a GOP source. Additional economic upticks could change that calculus further.
“I think conditions are definitely going to improve. We’ve seen the virus take down the best economy in the world, but it looks like it’s pretty resilient and starting to come back,” said Sen. John Cornyn (R-Texas), one of McConnell’s deputies. Last week’s jobs report “surprised everybody. I’m beginning not to trust the ‘experts,’ the people who make all these predictions.”
The economic surprise was also viewed as a sign of hope for the GOP’s Senate prospects. The Republican battle to defend its majority was looking increasingly perilous amid more than 100,000 coronavirus deaths and Trump’s hard-line response to the nationwide protests after George Floyd’s death by police in Minneapolis.
“Most people are economic voters,” said Senate Majority Whip John Thune (R-S.D.). “If people are thinking about their pocketbooks and voting on the economy, it bodes well for Republicans.”
While economists feared unemployment could hit 20 percent last week, instead it dropped more than a full percentage point to 13.3 percent.
Still, that’s the highest it’s been in 80 years, since the Great Depression — and if unemployment is still in double digits come November, that could be hard for Republicans to sell to voters. On Monday, the National Bureau of Economic Research confirmed that the economy has formally entered a recession.
Senate Minority Leader Chuck Schumer (D-N.Y.) on Monday called on McConnell to pass new relief legislation before the July 4 holiday. He said last week’s good news shouldn’t cause the fifth tranche of coronavirus money to stall.
“I fear that the recent bump in the employment number, caused in large part because of the stimulus money we pumped into the economy, will create in Republicans a sense of complacency and the economy will get even worse,” Schumer said.
That would be an unmitigated disaster for McConnell, who is running for reelection and trying to keep his majority in difficult conditions. And not all of his members are comfortable staying in a holding pattern: Gardner threatened to stop the last recess over lack of action on coronavirus relief legislation. Sen. Susan Collins (R-Maine) said she agreed with his stance. Both are running for reelection in blue territory.
But Gardner backed down after McConnell committed to modifying a popular small business program, which passed last week, and considering the public lands bill. After that bill, which would fund conservation programs and address national parks’ maintenance backlogs, advanced over a filibuster on Monday evening, Gardner called it the “first step in what will be other steps to get our communities back to work.” He declined to address the schedule of the next big spending package.
White House economic adviser Larry Kudlow last week said there might be “more pleasant surprises” in upcoming economic reports and suggested talks on Capitol Hill wouldn’t pick up until July at the earliest. Expanded unemployment benefits, which provide $600 weekly in additional assistance, expire at the end of July. That sets up a true congressional cliff, which Republicans might decide not to go over if the economy is still in rough shape a month from now.
The broad parameters for a new bill would likely include money for states, some form of unemployment aid and more money for health care. White House press secretary Kayleigh McEnany said on Monday that Trump is “open” to another bill and said Trump still wants a payroll tax cut, which many Republicans do not support.
Others want to do much more.
“The jobs report was great,” said Sen. Josh Hawley (R-Mo.), who is pushing a proposal to subsidize businesses to expand their payroll and has talked with Democrats about it. “Now, what I’d like to see us do is take action that will get more people their jobs back, including those who are in the permanent unemployed category.”
Hedge funds braced for second stock market plunge
Hedge funds are getting ready for another slump in stock markets after growing uneasy that surging prices do not reflect the economic problems ahead.
Some managers fear that equity investors, used to buying the dips during the decade-long bull market that ended in March’s sharp sell-off, have become too complacent about how quickly economies can recover from the coronavirus crisis and how effective stimulus packages from central banks and governments can be.
The S&P 500 index completed its best 50-day run in history on Wednesday, according to LPL Financial, closing within 8 per cent of its record high of mid-February.
“The markets are priced to perfection,” said Danny Yong, founding partner at hedge fund Dymon Asia Capital in Singapore. “The stability in equity markets does not reflect the job losses and the insolvencies ahead of us globally.”
Mr Yong has been buying put options — which protect against market falls by allowing their owner to sell at a pre-determined price — on stock indices and also on currencies sensitive to risk appetite such as the Australian dollar and the Korean won.
“I believe we will see new lows in global equity markets later this year,” he added. “As March . . . has shown us, prices cannot diverge from fundamentals for too long.”
Other hedge fund managers have expressed concerns about the sharp rebound in stocks from the March lows.Stanley Druckenmiller, a protégé of George Soros who stepped back from managing outside money a decade ago, recently said he expected a wave of bankruptcies and that a V-shaped economic recovery was a “fantasy”.
Paul Singer’s Elliott Management, which has $40bn in assets, wrote in its most recent letter to investors that since the impact of the economic downturn is greater than that of the 2008 financial crisis, “our gut tells us that a 50 per cent or deeper decline from the February top might be the ultimate path of global stock markets”.
The fund made money during the first-quarter crash from hedges in stocks and credit, and said it was trying to find new ways of protecting itself against another market fall after some hedges became more expensive.
Despite a slew of bleak economic data — including more than 40m Americans filing for unemployment benefits and an expected record contraction in the eurozone economy in the second quarter — the S&P 500 has surged almost 40 per cent since its trough in March, leaving it down just 3 per cent for the year. The index is now trading at more than 22 times expected earnings for the next 12 months, according to FactSet figures, taking the common valuation measure back to levels not seen since the early 2000s.
Standard & Poor’s building in New York’s financial district. The S&P 500 has surged almost 40 per cent since its trough in March © Reuters
Mr Yong believes investors could soon discover that the so-called “Fed put” — the concept that the central bank will step in to support markets — may be reaching its limits.“Some people believe the Fed’s unconventional measures are limitless but this is not the case,” he said. “It’s now about the “Trump Put” — how much more stimulus can he push through? I think he [US president Donald Trump] will be constrained by Democrats in the House.”
Morgan Stanley said in a recent note that its hedge-fund clients hold a net short position of about $40bn in Euro Stoxx 50 futures. Global macro hedge funds have sharply reduced their exposures to stocks this year, according to JPMorgan Cazenove.
“It is entirely possible that there will be a fourth-quarter reckoning, where a second wave of job losses and a prolonged period of business failures tests equity sentiment,” said Seema Shah, chief strategist at Principal Global Investors.
Francesco Filia, head of London-based hedge fund Fasanara Capital, is holding 70 per cent of his fund in cash and also using put options and other instruments to hedge his portfolio while he waits for a “severe rupture” in markets.
He sees threats in the trend towards “deglobalisation,” which could drive inflation higher, and growing political interference in the technology sector, which could hurt shareholder returns. He expects a potential “2008-style . . . daily liquidity crisis” as investors try to pull money from exchange traded funds that may not be able to meet those redemptions.
However, many fund managers are reluctant to bet outright against stocks in the face of stimulus efforts from the Federal Reserve and European Central Bank, both of which have argued they have firepower in reserve.
The market hitting new lows “is possible”, said Tom Clarke, who has a low exposure to stocks at a macro fund at William Blair in London. But he added that government and central bank stimulus packages have “taken on almost mythical proportions. There’s no doubt in which direction policymakers want markets to go.”
Key Economic Indicators Are Weirdly Inverted. It’s a Warning Sign.
As the United States enters the fourth month of a combined public health and economic crisis, data on the state of the economy and the personal finances of individuals have gone weirdly inverted—and may do so again.
The inversion came in the form of figures showing Americans’ collective income rising by double-digits, even as tens of millions of people lost jobs, incomes, and businesses. It’s a statistical oddity caused by Congress’ massive infusion of cash into the economy. It suggests that the economy may be even more precarious than previously believed, because when government help dries up, there will be less purchasing power supporting the broader economy.
Personal income rose 10.5% for March, according to the latest Bureau of Economic Analysis figures, while consumption fell by 13.6%, leading to a massive increase in the savings rate for households.
The dollars going into the pockets of households largely came from government benefits, including $1,200 stimulus checks for many individuals and expanded unemployment insurance that gave an extra $600 a week to many recipients, among other changes. Households saved a third of their income in April as their spending on restaurants and travel dropped, along with spending on health care as people stayed away from doctor’s offices and hospitals.
This pattern confirms what other data and reports from corporate executives have shown: While there’s been some real material deprivation thanks to sky-high unemployment and pay cuts for some workers, incomes and spending have been more resilient than the headline unemployment numbers have indicated.
But because the resilience in consumption has been overwhelmingly due to direct government support, the only thing holding the economy back from the abyss are government payments that some policymakers are reluctant to renew. Without new legislation, the expanded benefits are scheduled to run out by the end of July. Last week, Senate Majority Leader Mitch McConnell said any new stimulus should be under $1 trillion, several times less than what some economists say is necessary to avoid ongoing economic calamity.
The importance of direct government spending is right there in the personal incomes figures. Of the annualized $20.7 trillion of personal income earned in April, more than $3 trillion came from government payments or unemployment, compared to $70 billion in March. Wages, on the other hand, dropped about 8%.
The BEA data showed that while incomes went up, spending on durable goods fell 16% in April, indicating little confidence that incomes will hold up going forward as the economy remains depressed and government benefits holding up spending expire or peter out.
A probable scenario in the late summer and fall is that large numbers of jobs will be created and gross domestic product will soar as states and localities allow businesses to re-open. At the same time, many people may end up worse off: Either they will return to work to receive a lower wage than what they were getting from unemployment, or a large portion of prepandemic jobs simply won’t come back, leaving the economy at risk from an overall deficit in demand as opposed to “just” a viral attack.
The Congressional Budget Office projects that GDP will fall at a 38% annual rate in the second quarter, before rising 22% annualized in the third quarter, as the economy begins to snap back. The CBO projects the unemployment rate will to drop over 4 percentage points, from 15.8% to 11.5% from the third to fourth quarter of the year. Right as the presidential campaign hits its climax, there could be some of the “best economic data we’ve seen in the history of this country,” the former Obama administration Jason Furman told a group of officials, according to Politico.
But even the CBO’s projection still puts the unemployment rate at the end of 2021 at 9.3%, well above its pre-Covid level and indicative of deep economic damage.
These projections could be optimistic. There are signs that a wave of outright business failures is building.
“If the unemployment benefits really roll off at the end of July, it is absolutely not a given that the third quarter looks like anything special,” says Claudia Sahm, director of macroeconomic policy at the Washington Center for Equitable Growth.
There is some inkling of a recovery in jobs listings for the sectors most affected by stay-at-home orders, according to data collected by the jobs site Indeed. The beauty and wellness sector is leading the way, says Indeed research director Nick Bunker But the good news for hair salons will quickly sour if their clients don’t return—and that requires the rest of the economy besides personal services to hold up. The data, however, indicates that economic rot is spreading. “Higher-paid, traditional, white-collar jobs are actually leading the trend in jobs postings continuing to decline,” Bunker says. That’s a sign of the economy going from bad to worse: The economic shock from the coronavirus is hitting jobs that aren’t directly affected by stay-at-home orders.
Typically during recessions, all sectors of the economy and labor market are hit, and if nonservice jobs are starting to disappear or not be created, it means that the economic shock from Covid-19 may have entered a new phase, Bunker said.
New unemployment claims are no longer setting records, a development the White House has pointed to as a sign of hope. But there are still millions of people signing up for unemployment every week. For that to continue well after shelter-in-place orders went into effect indicates that permanent damage to the economy could be setting in.
“If you think about why a business might be laying someone off this late in the pandemic, it’s mostly pretty bad news,” Adam Ozimek, the chief economist at Upwork, told Barron’s. “It means either their business is struggling worse than they planned, and are unable to retain as much staff as they wanted so they are cutting back. Or it might mean that they are going out of business and firing the employees they had retained.”
Permanent job losses are worse for the economy and for workers than temporary ones, adds Ozimek. After a temporary layoff, an employee can return to the workforce with as little as an email saying come back to work when their employer’s prospects are strong enough to re-open. “Permanent layoffs, in contrast, means for that person to be re-employed two things need to happen: Some business needs to create a new job, and the unemployed person has to find a new job,” he said.
The Bureau of Labor Statistics’ jobs report for May, due on Friday, will give more granular detail on how many layoffs are permanent, Bunker said. But the mere fact that there’s still such a high level of claims, Ozimek said, is evidence that there are a substantial number of permanent layoffs.
Using data from the timesheet company Homebase, University of California professor Jesse Rothstein and colleagues have identified businesses that shut down and are now reopening in real time. “It’s giving us a sense that reopening has gone faster than I anticipated. I would not have guessed that such a large share of firms have reopened at this point.”
The most recent update from Rothstein and his colleagues using the Homebase data shows that about half the businesses that did shut down have reopened. “Reopened firms had collectively regained over half of their baseline hours and nearly 60 percent of their baseline employment levels. Almost 90 percent of this reemployment came through rehiring employees who worked at the firms before they shut down, as opposed to new hires,” he said.
“I still think there’s a big question of how many will reopen,” Rothstein said.
The risk for the economy today is that a combination of Republican preferences for less spending, eagerness to “get back to normal,” and simple inertia may inhibit the government providing what the economy needs most.“People need money,” says the Washington Center for Equitable Growth’s Sahm.
“If Congress and the Fed can’t do more,” Sahm said. “Do you really think it’s going to snap back to normal?”
Matthew Zeitlin is an economics journalist in New York.