It’s been awhile since I last wrote about my interest in companies who’s post Covid potential would have the added benefit of any government expenditures towards infrastructure spending. And while little has been done in the latter, mostly a result of a dysfunctional two party system that won’t talk to one another, ongoing coverage of challenges faced by a number of big cities in the face of property damage caused by the less peaceful of protesters has, in my opinion, upped the ante. Namely, there is change abound, and looking for investment where that change has the highest probability of occurring, is my strategy in a world of rapidly changing strategies.
Markets
The markets came into the week overshadowed by a number of respected momentum technicals suggesting the broad indexes were overbought. That said, added variables of volatility further suggest that overbought is not a symmetric outcome of the markets in today’s world. Those with skin in the game understand the disconnect of the NASDAQ Composite from the S&P500, finishing the week at 22.8% and 4.3% respectively. And the Dow Jones Index, the medias favorite go to index, finished with a decline of -2.2%. I mention this because it is becoming increasingly obvious that using the Dow as a benchmark has told the world nothing about why the capital markets have performed as they have. Even as the week saw selling in the technologies to accumulate industrials and to a lesser extent energy. And not to forget the Pindudes who’ve abandoned the tech stocks, however not sold them, in favor of cruise lines, airlines and all sorts of names in that I’m totally unfamiliar with. This is worth noting because holding the tech stocks is both a strategy of the speculators and more importantly the institutions who’ve seen analysts go neutral (albeit with higher price targets) in favor of investing in more cyclical diversification. Therefore, rather than dismiss the disconnect as simply an overvaluation, I prefer to see it as simply overbought and remain vigilant for opportunity while pondering whether the NASDAQ might be a worthy replacement benchmark for the Dow.
Economics
The week started with both Producer and Consumer Price indexes coming in with an increase of .6%. Both unsurprising as inflation is clear to many consumers homebound from the virus. One could also point to the dollar that has weakened over the past few weeks as a reason for producer prices seeing a rise. Whether this is the beginning of a inflationary trend is still to early to call, for me anyway, but both are a sign that the economy is brewing some heat even while marginally reopened. An inflation indicator that I prefer to watch is the Employment Cost Index that measures the compensation costs for civilian workers that has been gradually increasing as well, coming back from an expected sharp decline, but still showing a 2.7% increase for the 12 month period ending in June according to the Bureau of Labor Statistics. Simply put, inflation in the hands of consumers, comes from cash, demand is currently outweighing production and hence consumer inflation. A bright spot occurred later in the week with the release of initial claims for unemployment insurance (Jobless Claims) which fell 228K and brought the total to 963K the first time under a million since March. That data along with today’s Retail Sales data released by the Commerce Department show a rise of 1.2% in July. Overall, the data still has to be considered in context with the weak condition of the overall economy. But watching for next month’s Employment data and listening for any sign of activity in Washington, could at the very least maintain the trend.
External Events
The current narrative is one to amaze as every pundit embedded from finance to politics seems intent to talk about an economy, a market, and even a country that would take a reckless statistician to fabricate its absent justification. I think so because I see no direct influence on overall social mood and its subsequent impact on the capital markets. The market activity is, in my opinion, the best indicator an analyst can use to determine the current state of the economy, because investors understand the risk of participating. But more has to come in the form of the variables. Will an additional stimulus package be coming, will international disruption escalate, or can social mood remain distracted? Lastly, as long as the two parties seek to blur the picture the more, I prefer to see their relationship as a divorce made in heaven. But few are lost on the dangers of the pandemic, particularly those who are too smug to care, few are lost on the vast harm to the economy from the lock down, except those without responsibilities, and few are lost on the need for politicians to cooperate, not to dictate.
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