Markets breathed a sigh of relief after another week of better-than-expected economic data. Both the manufacturing and services sectors of the U.S. economy expanded in July, initial jobless claims fell and the unemployment rate dipped. So far, so good.
Politics … well, that’s a different story. Last week, political tensions added another layer of uncertainty to an economy and society deeply shaken by the coronavirus.
Stimulus talks stalled again, and on Saturday President Donald Trump acted unilaterally and signed four executive orders. In all, the orders would extend unemployment benefits at $400 with states pitching in $100, defer the payroll tax for those making less than $104,000, extend federal relief for student loans and evictions. The orders bypass a fundamental power of Congress — federal spending — and are likely to face legal challenges.
International feuds are also simmering. Canada plans to slap $2.7 billion in tariffs on U.S. goods after President Trump chose to reimpose 10 percent duties on Canadian aluminum. China also plans to strike back after the president issued an executive order barring U.S. companies from doing business with ByteDance Ltd. (owner of social media app TikTok) and Tencent Holdings. That same day the president’s Working Group on Financial Markets recommended delisting Chinese companies that don’t allow regulators to access their audit work papers — companies have until Jan. 1, 2022 to comply.
This all comes as the presidential election is now fewer than 100 days away.
In summary, there’s a lot of uncertainty. But beneath it all the economy is moving in the right direction, even if we are experiencing isolated setbacks due to the virus or international tensions. That may lead to volatility in the near term, which is why a solid financial plan should be crafted for long-term outcomes. It’s designed to absorb some bumps along the way.
WALL STREET WRAP
Unemployment Headed in Positive Direction: Last week’s much-anticipated unemployment report showed U.S. employers added 1.8 million jobs in July, which pulled the unemployment rate lower to 10.2 percent. While that’s significantly lower than the high-water mark of 14.7 percent reached in April, it remains historically elevated. Markets weren’t moved that much Friday, likely a sign that expectations were met.
The report marked a step in the right direction but also reflected challenges that remain as our country grapples with persistent coronavirus cases. On one hand, the labor market is faring better than feared. The report shows hiring increased for the third straight month, with gains in hospitality, business services and health care. Initial jobless claims (released Thursday) also declined to 1.2 million last week, their lowest weekly tally since March.
On the other hand, the coronavirus continues to cloud the recovery path, especially in places where cases are on the rise. A return to lockdowns in isolated areas has pushed newly opened businesses to scale back operations or close again. Indeed, a Cornell University survey released last week revealed 31 percent of workers who were recalled after being furloughed were laid off a second time.
Overall, the labor market is improving, but the coronavirus will determine the pace of that recovery.
ISMs Beat Expectations: A pair of key U.S. economic gauges came in better than expected in July. The Institute for Supply Chain Management on Monday said its manufacturing PMI increased to 54.2 last month, up from 52.6 in June (a read above 50 indicates expansion). Production and new orders were the strongest they’ve been since 2018. Across the board, survey respondents described a stabilizing environment, with hints of caution driven by uncertainty about the future.
The ISM’s counterpart, the services PMI, registered 58.1 percent in July, up from 57.1 the month prior. That’s the second-consecutive month in expansion territory following a contraction in April and May. Optimism is rising as businesses reopen, though sentiment varies as the services sector encompasses a wide swathe of industries that are impacted differently. Of note: New orders hit their highest level ever, going back to 1997 when the data series began.
Like the labor market, these are signs that economic activity is normalizing. While that’s encouraging, the inherently unpredictable path of the virus continues to cloud the outlook for businesses.
Softer Data from China: The services sector in China cooled a bit in July as the Caixin services index dipped to 54.1 from 58.4 in June. It’s the weakest reading in three months but remains above 50, or in expansion territory. The Caixin manufacturing index, in contrast to services, rose to 52.8 — the highest since January 2011.
Overall, business expectations for the next 12 months reached their highest point since March 2015. While the month-to-month gains may decelerate as the Chinese economy returns to normalized conditions, the outlook remains optimistic. More broadly, the J.P. Morgan Global Composite PMI hit 50.8 for the first time since January 2020 (up from a low of 26.2 in April). That’s a clear sign that the economic rebound is resonating all over the world.
THE WEEK AHEAD
Main Street Mindset: We’ll be digging into the NFIB’s survey of small business owners this week to see just how heavily the rise in coronavirus cases is weighing on sentiment. As we’ve seen in hotspots around the country, businesses have had to pull back weeks after reopening. In other places, the path to reopening is progressing at a smoother pace. The survey will provide important insights from this key demographic about current conditions, hiring, the path ahead and other challenges they are encountering.
A Check on Retail Momentum: The July retail sales report is another important report coming Friday. The month-to-month increase is expected to slow to 1.9 percent. A strong consumer means a strong U.S. economy, as spending accounts for 70 percent of GDP growth. As always, we’ll look for places where spending is recovering and how consumers are getting the goods and services they need. Going forward, it will be important to note how the next stimulus package may impact spending behaviors in the U.S.
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As the chief investment officer at Northwestern Mutual Wealth Management Company, I guide the investment philosophy for individual retail investors. In my more than 25 years of investment experience, I have navigated investors through booms and busts, from the tech bubble of the late 1990s to the financial crisis of 2008-2009. An innate sense of investigative curiosity coupled with a healthy dose of natural skepticism help guide my ability to maintain a steady hand in the short term while also preserving a focus on long-term investment plans and financial goals.