Stocks continued to rally Monday through Wednesday despite a lack of progress on a stimulus bill. The Congressional Budget Office projected that the federal debt held by the public is expected to exceed 100% of the gross domestic product next fiscal year beginning October 1st. This is will be the first time the debt has been this high since 1946 following World War II when it hit 106.1% of GDP. Compared to other countries, Japan is at 268% of GDP, Italy is at 141.4% of GDP and Germany is at 77.2% of GDP. Government debt loads have increased globally as countries borrow to counter the economic effects of Covid.
Stocks sold off sharply on Thursday with the S&P 500 index declining the most since June and the Nasdaq index declining the most since March.
Friday stocks closed lower after trying to turn positive in the afternoon.
Putting it in perspective with the Nasdaq index having been up 59% from the March low, we were not surprised by a correction. However, many technology, online shopping and biotechnology companies have seen strong earnings growth. That coupled with multiple expansion due to ultra-low interest rates can underpin much of the gains. There was no headline, no smoking gun, to trigger this event. It is our opinion that corrections can come any time for any reason. We do not see this a the start of a long term trend. Yes many cyclical and value stocks may perform better as the economy improves but we see this as a gradual improvement. Travel may start to recover when there is an effective vaccine widely available. While some test results have been positive, a vaccine may not be until sometime next year.
Treasury yields fell with the 30-year bond yield at 1.464% and the 10-Year note at 0.717%. Crude oil fell to $39.54 a barrel and natural gas fell to $2.583 per MMBTUs. The U.S. dollar index rose to 92.75 and gold prices fell to $1943.50 an ounce.
In the economic numbers this week:
- IHS Markit reported the following purchasing managers indices. Keep in mind that anything above 50 represents expansion and below 50 represents contraction.
- U.S. manufacturing rose from 50.9 in July to 53.1 in August.
- U.S. services rose from 50.0 in July to 55.0 in August.
- Mexico manufacturing rose from 40.4 in July to 41.3 in August.
- Canada manufacturing rose from 52.9 in July to 55.1 in August.
- Eurozone composite (both manufacturing and services) decelerated from 54.9 in July to 51.6 in August.
- China manufacturing rose from 52.8 in July to 53.1 in August.
- China services from 54.1 in July to 54.0 in August.
- Japan manufacturing rose from 45.2 in July to 47.2 in August.
- Japan services fell from 45.4 in July to 45.0 in August.
- The Commerce Department reported:
- The U.S. trade deficit rose 19% in July to the highest level since July 2008. Imports increased as consumer spending picked up and business activity resumed. Exports also increased but given that the level of imports are much higher, the deficit grew.
- The Labor Department reported:
- A seasonally adjusted 881,000 workers filed initial claims for unemployment last week, down 130,000 from the week before.
- Continuing claims fell from 14.5MM to 13.3MM.
- The U.S. added a net 1.4MM jobs in August and the unemployment rate fell to 8.4%.
- The EIA weekly oil report is attached. Also, the EIA reported in the past week:
- Field production of crude oil fell from 10.8MM barrels per day to 9.7MM barrels per day.
- Natural gas storage rose by 35BN cubic feet and is above the highest level at this time of year during the past five years.
- Baker Hughes reported the number of active oil rigs rose 1 to 110. The number of active natural gas rigs was unchanged at 72.
Please call us if you have any questions.
Loren C. Rex, CFP®, AIF®, MA Erik A Smith AIF®
President Managing Partner
Generations Financial Planning & Wealth Management 269-441-4143
77 E. Michigan Ave, Suite 140
Battle Creek, MI 49017
Carrie Fuce, Assistant 269-441-4091
Toll Free: 800-513-8180
Visit our Website: www.genfinplan.com
Registered Representative of and securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Generations Financial Planning & Wealth Management are separate companies and are not affiliated.
These are the opinions of Loren Rex and Erik Smith and are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. The Indices mentioned are unmanaged and cannot be invested into directly.