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MARKET UPDATE
subscribe at sandyleeds.com
October 5, 2020 – Market Update
Table of Contents
I. Last Week
A. Stocks
B. IPOs
C. Hiring Has Slowed
II. Key Ideas from Dallas Fed Pres. Robert Kaplan’s Sep. 29th Essay
III. Other Stories
sandyleeds.com 1I. Last Week
A. Stocks
1. Last week: DJIA +1.9%; S&P 500 +1.5%; Nasdaq +1.5%
a. Market broke four-week losing streak
2. Big news from the week:
a. Pres. Trump’s illness brings new uncertainty to the markets
b. Contentious debate
c. Continued back-and-forth about a possible stimulus plan
i. Optimism that both sides were talking
ii. Stimulus would speed up recovery and limit downside
iii. Belief that Trump’s illness increases likelihood of stimulus
1. Counter the loss of momentum in recovery
2. Makes up for lack of campaigning
d. Economy continues to get better, albeit at a slower pace
i. Demand for homes remains off the chart
ii. ISM manufacturing survey dipped to 55.4 in Sep. from 56 in Aug.
1. Still above 50 – signifying continued growth
iii. Jobs report was weaker than expected, but private payrolls positive
1. Added 661K jobs
a. 200K short of projections
b. Two previous months were revised up by 145K
2. Unemployment fell to 7.9% (from 8.4%)
a. Misclassification of “employed but not at work”: +.4% = 8.3%
3. Payrolls remain 10.7MM below February peak
iv. Disney announced layoffs of 28K; airlines announced 30K
v. Personal income dropped 2.7% in August; spending +1%
3. Looking ahead:
a. Q3 earnings season begins in two weeks
b. VIX has been trading well above 20 since the end of February
i. At current levels, this implies daily market moves of at least 1%
B. IPOs
1. There have been 127 operating company IPOs (not counting SPACs)
a. On an equal-weighted basis, first-day pop of 38%
i. This meant $24B of underpricing (most since 2000)
1. Bill Gurley says that this money came from employees, investors, and
founders
a. Gurley prefers direct listings and SPACs
ii. $189MM per IPO
iii. Snowflake had largest underpricing: $3.75B
2. Arguments for other approaches:
a. Direct listings work well for companies that don’t need more financing
b. Merge with SPAC and you may be able to add more cash than raised in an IPO
sandyleeds.com 2C. Hiring Has Slowed
1. Added 661K jobs (payroll report)
a. Replaced 11.4MM of the 22MM jobs lost in March and April
i. But payrolls are 10.7MM lower than February
b. The past three months combined have done 1/2 of what May and June did
2. Unemployment rate of 7.9%
a. 12.6MM people unemployed (household survey)
i. 6.8MM higher than February
b. The labor force participation rate dropped .3% to 61.4% (was 63.4% in February)
3. In April, 88% of those who recently lost jobs reported their layoffs as temporary
(meaning they expect to return to same role within six months). In September, that fell
to 51%.
a. Permanent job losers rose from 2MM (in April) to 3.8MM.
b. Those on temporary layoff decreased from 6.1MM to 4.6MM
i. Was at 18.1MM in April
4. 1.3MM drop in part-time for economic reasons to 6.3MM
a. But still 2MM more than February
5. In September, 22.7% of employed person teleworked because of the virus
a. Down from 24.3% since August
6. 19.4MM said that they had been unable to work because their employer closed or lost
business (i.e., didn’t work or worked less b/c of virus)
a. Down from 24.2MM in August
7. Government hiring has compounded the problem:
a. Census hiring is being unwound
b. Massive cuts in state and local government employment
c. Government employment has dropped by 1.2MM people since February
i. ~10% of jobs lost since February
8. Last month, 58% of unemployed workers had been out of a job for at least three months
(including 19% who had been out for six months).
a. 23% of long-term unemployed were Latino workers and 21% were Black workers
i. Disproportionate relative to share of the population (and labor force)
(WSJ) (WSJ)
9. My best estimate of the true unemployment rate is 10.7%:
a. Take the participation rate back to 63.4% (start of year)
b. Add .4% for misclassified workers (this is BLS estimate)
sandyleeds.com 3II. Key Ideas from Dallas Fed Pres. Robert Kaplan’s Sep. 29 th Essay
1. Consumer spending has been unusual. Drop in income could be headwind.
2. The Dallas Fed Mobility and Engagement Index (MEI) tracks spatial behavior of anonymized
cellphone users to gauge the level of engagement in range of activities
a. Progress has stalled since summer; correlated w/ path of virus
3. We need to improve future adaptability and employability of those with lower levels of
educational attainment (create a stronger and more inclusive labor market):
a. Address lagging early-childhood literacy
b. Improve educational attainment levels
c. Beef up skills training across the U.S.
d. Create more access to broadband (and other targeted infrastructure)
4. Low growth is limiting pricing power of businesses, so businesses investing in technology
a. To replace people, lower costs, and improve competitiveness
b. More of nonresidential fixed investment is technology
5. Greater investment in technology may continue to mute the pricing power of businesses
a. May offset the cyclical inflationary impact of a tightening job market
6. U.S. oil production: ~12.8MM barrels per day (Dec. 2019) to ~10.7MM by Dec. 2020
a. Oil production growth will likely be flat during 2021
7. If inflation expectations drift down, nominal interest rates will move lower
a. This will leave the FOMC will less room to drop the Fed funds rate
8. While we should keep rates at zero until economy is on track to reach dual mandate, we should
remain flexible (and give future FOMC flexibility)
a. Important difference b/t remaining “accommodative” and keeping rates at zero
9. As we start to approach the dual mandate, the equilibrium nominal rate of interest (also known
as R* or the neutral rate of interest) is likely to increase
a. So if we don’t raise rates, this makes policy more accommodative
i. Future FOMC should have flexibility to decide if they want this
10. There are real costs to keeping rates at zero for a prolonged period of time
a. Adversely impacts savers
b. Encourages excessive risk taking
c. Creates distortions in financial markets
i. Seizing up of fin’l mkts in March: partly caused by forced selling by over-risked
market participants
11. Future FOMC will need to assess implications of:
a. Acceleration in rate of new technology adoption and technology-enabled disruptions
b. Changes in our views regarding how monetary policy impacts inflation
c. Changes in tax policy
d. Changes in regulatory policy
e. Changes in trade policy
f. The role of the dollar as the world’s reserve currency
12. Commitment to keeping rates at zero can help lower today’s long-term yields (stimulus)
a. But, I’m skeptical of the benefits right now
i. We’re at historically low rates
ii. Expectations were for rates to stay low for next few years
iii. SEP was showing that participants expect low rates for some time
b. We should defer using forward guidance until benefits more compelling
sandyleeds.com 4III. Other Stories
Markets
Market performance
1. Despite a 47% rise since March 23, the S&P 500 is up just 2.1% in 2020.
a. The DJIA is down 4.8% and the Russell 2000 is off 12%.
b. The Nasdaq is up 22%.
2. Several bond index ETFs have returned 7% - 10%.
3. Over the past 20 years, the average annual return on the S&P 500 is 4.25%.
a. With dividends, the return is 6.32%. (WSJ)
Q3 results
1. In Q3, the S&P 500 gained 8.5% and the DJIA gained 7.6%.
a. Both indexes are up more than 26% since the end of March.
2. The Nasdaq gained 11% in Q3 and 45% over the past six months (the biggest two-quarter
gain since 2000).
3. Consumer discretionary, materials, and industrials were the three best performing sectors
in Q3, while energy was the worst. (WSJ)
Big winners
1. More stocks skyrocketed at least 400% at some point in the first three quarters of the year
than any comparable period since 2000.
a. Zoom has rallied 591% while Overstock is up 956% and Tesla is up 413%.
b. The S&P 500 is up 4.1% for the year.
2. At their individual peaks in 2020, more than 60 stocks in the Nasdaq have risen at least
400%.
a. But, more than 1,000 (of the roughly 2,500) had suffered declines of at least 50% for
the year at their low points. (WSJ)
Growth vs. value
1. The Russell 1000 Growth Index was down 4.8% for September while the Value index fell just
2.6%.
2. This ended Growth’s 11-month winning streak. (WSJ)
Palantir’s direct listing
1. Palantir did its direct listing and started trading at $10.
a. It ended the week closer to $9 after trading as high as $11.42.
2. In private trades during August and September, the stock changed hands between $7.32
and $9.17. (WSJ)
Negative rates
1. The eurozone, Denmark, Japan and Switzerland all have negative rates.
a. Sweden is at zero.
2. SF Fed research suggests that the longer negative rates are in place, the more they hurt not
only bank profits but bank lending too. (WSJ)
sandyleeds.com 5Bonds
1. U.S. companies sold more debt in Q3 of 2020 than ever before.
a. Investment grade issuers sold $267B of bonds while junk issuers sold $119B.
b. This followed the record $822B sold in the first six months.
c. Companies have now issued $1.4T of bonds in 2020.
d. Bond investors have added an additional $273B to corporate bond funds.
2. Investment grade bonds are yielding an extra 1.36% (over Treasuries) while junk bonds
are yielding 5.17%.
3. Why debt issuance could slow:
a. Refinancing seems to be slowing, as these deals dropped 37% from Q2 to Q3.
b. M&A has been slow to recover (and this could impact future debt issuance).
i. Of 200 investment grade bond deals in Q3, fewer than ten were tied to
acquisitions, bringing the yearly total to 20. (The first nine months of
2019 had 31.) (WSJ)
Fallen angels.
1. The overall share of investment grade corporate debt rated BBB is hovering around the
same 50% mark where it was at the end of 2019.
a. Fallen angels peaked in March.
2. In April, the Fed extended its corporate bond purchase program to issuers that lost their
investment grade rating after the onset of the pandemic.
a. That opened the funding market and fewer bonds were downgraded.
3. It is strange that companies like Delta have maintained their BBB rating.
a. It’s hard to imagine that their credit rating hasn’t changed. (WSJ)
Election
WSJ/NBC poll conducted during two days after debate. (WSJ)
1. A new WSJ/NBC News poll showed Biden beating Trump 53% - 39%.
2. While Pres. Trump’s impeachment didn’t change voters’ view of him, the debate seems
to have had an effect.
3. 50% say next President should fill the Supreme Court vacancy; 38% say Trump should
a. Similar to Biden vs. Trump numbers
Fear over violent protests.
1. A Morning Consult/Politico poll said that 73% of voters are “very” or “somewhat”
concerned over violent protests occurring in response to the results of the 2020
presidential election.
2. Sixty-five percent say they are worried about the prospect of a delay in a definitive
outcome, while 60% express concerns with potential tampering with mail-in ballots.
3. Fifty-three percent of all voters said that they were concerned the president would not
leave office if he loses in November. (IBT)
sandyleeds.com 6Economy
The CBO’s lower growth estimate.
1. Lower growth in the labor force
a. In 2000, the fertility rate was 2.1.
i. It is estimated to be 1.6 now, but is expected return to 1.9 by 2026.
b. Immigration is also expected to decrease.
2. Productivity growth is expected to decrease as fewer workers lead to less investment
and high government debt “crowds out” private investment. (WSJ)
Initial jobless claims.
1. There were 837K initial claims for unemployment insurance.
a. This is the fifth straight week where the number is between 800K and 900K.
2. Continuing claims fell by 980K to 11.8MM (the lowest level since March).
a. California’s numbers were delayed as they are taking two weeks to process a
backlog of claims. (WSJ)
Income fell.
1. Personal income (salaries, investments, government aid) fell 2.7% in August as
unemployment checks shrank.
a. 52% decline in money received from unemployment (WSJ)
b. But, household income was still 2% higher than February.
2. August spending increased 1% after growing 9% in May, 7% in June, and 2% in July.
(WSJ)
COVID-19
Fears of third wave of COVID-19 in the U.S.:
1. The second wave ebbed on September 9th when cases dropped to 34,300.
a. Cases have jumped to 45,300 per day.
2. There is concern that the third wave is starting from a higher level (45K) compared to
the second wave (started at 34K).
a. Add in the cold weather and the holidays and it could be really bad.
3. The first wave lasted from mid-March to early April when infections peaked at 32K.
a. In the second wave, cases peaked at 67K per day in mid-July. (IBT)
Insolvencies.
57% more business insolvencies are expected in the U.S. in 2020 than in 2019. (IBT)
Retailers
1. This year’s collapse in American retail could overtake that of 2010, when 48 retailers
filed for bankruptcy.
2. Through mid-August, there have been 29 retailers that have filed for bankruptcy.
a. In the first six months, there were 18; in July through mid-August, there were
another 11.
3. In all of 2019, there were 22 retailer bankruptcies. (WSJ)
sandyleeds.com 7The Fed’s new survey
1. Households’ median net worth rose 18% from 2016 to 2019 to $121,700.
a. Families in the lowest two income groups recorded large percentage increases
in net worth.
i. Net worth rose 37% to $9,800 for the lowest earners, and increased 40%
to $44,000 for the second lowest group.
ii. Home ownership gains and home price gains helped boost net worth for
lower earners.
b. The median net worth of the highest and second highest groups declined 8%
and 9% respectively.
2. The top 10% of families held 71% of wealth (same as 2016).
a. The share of wealth of the top 1% fell from 33.9% to 33.1%.
b. This was 25% in 1989.
3. The median net worth of white, non-Hispanic households rose 3% to $188,200.
a. The wealth of Black households rose 33% to $24,100.
b. Latino households increased their median net worth 65% to $36,200.
4. Median household income rose 5% to $58,600. (WSJ)
The Danger of Following the Fed, by Otmar Issing (former Chief Economist and Member of the
Board of ECB), Oct. 2, 2020
The Fed’s new strategy (announced in late August), should probably not serve as a global
benchmark for the conduct of monetary policy. Several reasons:
1. Can an average 2% inflation rate anchor expectations if the FOMC hasn’t described:
a. The past period of which we’re concerned about undershooting
b. The procedure for deciding on the duration and distribution of higher inflation
in the future
2. Fed Chair Powell has said that the FOMC won’t set a numerical objective for maximum
employment because it can’t be measured and changes over time
a. So we don’t know what kind of shortfall will trigger FOMC policy action
3. The Fed has now explicitly assumed responsibility for income distribution
a. Powell touted the narrowing of the differential between unemployment rates of
Black Americans, Hispanic Americans, and white Americans.
i. But, this will eventually backfire
1. Once the Fed begins to tighten monetary policy, it will come
under immense political pressure not to hurt the poorest
members of society
4. The Fed’s new strategy contains no answer to the challenge of building an inflation-
targeting model that integrates financial-system risks
sandyleeds.com 8Diversity and Other Issues
Diversity
1. Among CEOs of S&P 500 companies, 11% are ethnic minorities:
a. 3% are Latino, 3% are Indian, 2% are Asian, 1% are Middle Eastern, 1% are Black,
and 1% are multiracial.
i. There are only four Black CEOs in the S&P 500.
2. Among all U.S. companies with 100 or more employees, Black people hold just 3% of
executive or senior-level roles (according to the EEOC).
a. Black people make up 13% of the U.S. population. (WSJ)
3. Issues:
a. Recruiters and senior executives say Black professionals face greater obstacles
early in their career, are viewed more critically than their colleagues and
frequently lack the relationships that are critical to advancement.
b. There is emphasis in recruitment but not retention and advancement.
Women hurt in labor market.
1. While women are 47% of the U.S. labor force, they accounted for 54% of initial
coronavirus-related job losses and still make up 49% of them, according to McKinsey
2. Approximately 23% of women say that they are considering dropping out of the work
force (since the start of the virus) compared to 11% of men.
3. 51% of women say that they are responsible for most or all of the housework and child
care as opposed to 16% of men.
a. Over 50% of female employees (and less than 40% of male workers) say they
spend an additional three or more hours per day on home duties (WSJ)
Go back to school. (WSJ)
1. Applications to some top-tier MBA programs are soaring this year as schools have
extended deadlines and loosened standardized testing requirements.
a. Wharton, Columbia, MIT and other elite programs are reporting double-digit
percentage gains.
2. Applications had been falling for five straight years due to a hot job market and high
tuition costs.
3. Last year, the students used extra rounds to make up for fewer international students.
Upping the ante.
1. A hacker published documents containing Social Security numbers, student grades and
other private info from a large public school district in Las Vegas.
a. Officials had refused a ransom demand in return for unlocking district computer
servers.
2. This is an escalation of tactics by hackers. (WSJ)
sandyleeds.com 9You can also read
