| Friday, August 14, 2020 Headlines 1. Stocks trade mixed and flat in narrow range 2. Retail sales report sends mixed message 3. Stimulus package in limbo 4. Greatest 100-day gain ever for S&P 500 Markets Closed
Year-to-Date
 Photo courtesy GettyImages/gregobagel
[Programming note: I'll be off for the next few days with my family, but James Chen has the wheel for the rest of the week, and we'll be sending you a slimmed down version of the Market Sum next week. Stay well, and thanks for reading. – Caleb]
Markets Today U.S. equity markets on Friday had a very hard time finding any real direction. Trading in a tight range, and still just below its February record high, the S&P 500 (chart below) meandered higher early in the day before falling in the afternoon and then recovering to end the day nearly flat (-0.02%). This past week, though slightly bullish overall, has seen quite a bit of indecision on the part of market participants. This is likely due to a lot of uncertainty and confusion given the dichotomy of a clearly hard-hit economy at the same time that markets fluctuate at or near new all-time highs.
Adding to this uncertainty, the new, heavily anticipated U.S. stimulus package remains in a congressional deadlock, which may potentially take several weeks to reach any consensus. Also, recent economic numbers, including Thursday's jobless claims and Friday's retail sales report, have produced some mixed messages about the current state of the economy and its potential trajectory (more below). The way things are going, it's likely there will be further indecision and market consolidation ahead.
The economic calendar is relatively light next week amid the dog days of summer. One key event will be Wednesday's release of the FOMC's latest meeting minutes. As usual, that release should provide further clarity as to the details of the Fed's stimulus efforts, and how they may affect both the economy and the markets. It's definitely worth a look.  Chart courtesy TradingView
[NEW READER SURVEY: We are running another two-week survey of our U.S.-based readers to gauge your sentiment and see what moves, if any, you have been making with your money given the market recovery and current economic conditions. We'll share the results, as always, and we thank you for your time and participation.]
Headlines:
 chart courtesy U.S. Census Bureau
Retail Sales Report Sends Mixed Message The U.S. Census Bureau released its eagerly awaited U.S. retail sales report for July on Friday morning, and the results sent a mixed message about the economy. Overall, retail sales in the U.S. are still strengthening, even to a new record high in July, but by a slower rate than expected. In July, overall retail sales increased by a rather tepid 1.2%, versus the 2.3% previously estimated by economists. This somewhat underwhelming increase was largely caused by a decline in automobile sales. The good news, though, is that, excluding autos ("ex-auto"), core retail sales gained 1.9%, which is higher than the 1.2% previously forecast by economists.
As the chart above from the U.S. Census Bureau shows, July retail sales increases are indeed very modest, especially when compared with the outsized increases in overall retail sales and especially auto sales in May, in addition to the dampened, but still solid, rise in June.
This stair-step decline in retail sales increases over the past few months is partly due to May's sharp rise in consumer sentiment in expectation of a decrease in the pandemic threat, followed in June and July by a marked resurgence in coronavirus cases. More importantly, government assistance in the form of one-time stimulus payments and extended federal unemployment benefits were at their height in May. By July, the stimulus payments were just a memory with no promise of further government money, and unemployed Americans were anticipating the end of extended benefits, also with no promise of more to come.
Overall, what is the retail sales report suggesting? Consumers are indeed still buying, but much more cautiously than in the previous couple of months. Without a strong rebound in the dire unemployment situation or more government stimulus, retail sales (and the entire consumer-based economy) will have a very difficult time recovering. Stimulus Package in Limbo Speaking of U.S. government stimulus, it's delayed again. Both sides of the debate have been sparring over the terms of the package for weeks. Now, both the House and Senate are essentially adjourned through the rest of the month, making a deal highly unlikely for at least several weeks.
In a nutshell, Democrats are pushing to double spending on the $1 trillion proposed stimulus bill while Republicans are resisting. Without the willingness or ability to come to a midpoint, the two sides are basically in a stalemate. Complicating matters, both parties will be preoccupied by political conventions in the next few weeks ahead of this year's elections. Meanwhile, as noted above, key stimulus programs from the previous bill have already expired or are close to expiring. While these conditions clearly have not made any significantly negative impact on surging financial markets, near-term economic conditions are likely to deteriorate even further without a new stimulus bill in place.  Chart courtesy LPL Research
Greatest 100-Day Gain Ever for S&P 500 Despite the very real threats to the economy that have been present for the past several months and continue to loom, equity markets, as mentioned, are still shrugging it off and looking optimistically towards an eventual recovery. At least that's what market returns are telling us.
According to LPL Research, as of Thursday's market close, the S&P 500 has just had its greatest 100-day gain ever at +50.8%. The only other 100-day period that came even close was the one ending on 7/30/2009, at +45.9%, which was the initial rebound from the Great Recession lows. What LPL Research also found, according to the table above, is that such large rallies in the past have mostly tended to lead to continued market strength. Of course, whether it happens this time or not remains to be seen. But these statistics certainly bode well for the markets, at least, during a time of exceptional economic and financial uncertainty. What to Expect in the Markets This Week First, here's a look at major asset classes returns year-to-date:  Events This Week Sunday, Aug. 16:
Monday, Aug. 17:
Tuesday, Aug. 18:
Wednesday, Aug. 19:
Thursday, Aug. 20:
Friday, Aug. 21:
Preliminary Injunction Against Uber and Lyft Goes Into Effect A California superior court judge granted the preliminary injunction we spoke about last week. The injunction forces Uber and Lyft to treat their drivers as employees and not contractors to comply with California Assembly Bill 5 (AB5) as part of a suit that asserts Uber and Lyft gained an illegal competitive advantage by misclassifying their workers. The injunction is set to go into effect on Thursday, Aug. 20, after a judge denied Uber and Lyft's request to delay the order, though both companies are seeking to appeal this decision. Both companies have said that if the injunction goes into effect, they'll have to temporarily suspend operations in the state, with Uber threatening to leave California permanently. Both companies are also working to get a ballot proposition, Proposition 22, passed in November, which would classify app-based drivers as contractors.
Nvidia and Alibaba Earnings While most of earnings season is over, there are still a few companies reporting, with chipmaker Nvidia reporting on Wednesday, Aug. 19, and e-commerce conglomerate Alibaba reporting on Thursday, Aug. 20. As computer chips are a commodity good, Nvidia's business tends to be cyclical. After a rough 2019, Nvidia has seen substantial gains in the last two quarters, and analysts are predicting they'll see continued growth this quarter as demand stays strong due to quarantine forcing everyone to continue working from home. Keep an eye on Nvidia's gross margin to see how efficiently they're running their business even in these relatively good times.
Alibaba is poised for growth, according to current analyst estimates, as China's economy recovers from damage caused by the COVID-19 crisis. Keep an eye on Alibaba's number of annual active customers in the Chinese retail market. This key figure is important as Alibaba gets its revenue from ads and the sale of services to its merchants, rather than from commissions on sales. That means there's a premium put on the number of eyeballs on its sites. One wildcard is the possibility that it could be delisted from U.S. exchanges. The Trump administration recommended a plan that Chinese companies listed on U.S. stock exchanges would need to comply with U.S. auditing requirements by 2022 or lose their listings. Keep an eye out for developments on that and see our full coverage of Alibaba earnings.
Central Bank Announcements Three central bank announcements are coming up this week. On Wednesday, the People's Bank of China announces its benchmark prime interest rates, which will give an idea of how they think the recovery is going. Also on Wednesday, the U.S. Federal Reserve releases the minutes from its last meeting, while on Thursday, the European Central Bank releases minutes from its last meeting. These can help us get insight into the thoughts of the people shaping monetary policy in two of the world's biggest economies.
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(chart courtesy YCHARTS)  Shares of McKesson are up by nearly 4.5% after President Trump made a deal with the pharmaceuticals distribution company to distribute the eventual coronavirus vaccine as part of Operation Warp Speed. DXC Technology's stock price rose by 4% amid the B2B IT services company filing for a debt shelf.  Southern Co fell the furthest today, though the gas and electric utility holding company's stock price only dropped by little more than 2.5%. Close behind is glucose monitoring systems manufacturer DexCom; its shares are down by over 2%. Word of the Day Consolidation is a term referring to security prices oscillating within a corridor and is generally interpreted as market indecisiveness. Said another way, consolidation is used to describe the movement of a stock's price within a well-defined pattern of trading levels. Consolidation is generally regarded as a period of indecision, which ends when the price of the asset moves above or below the prices in the trading pattern.  Image courtesy GettyImages/Steven Heap/EyeEm
Today in History Aug. 14, 1935: The Social Security Act was signed into law, assuring some retirement income for all working Americans. Payroll taxes were set at 1%, for both workers and employers, on the first $3,000 of earnings.
Sylvester J. Schieber and John B. Shoven. "The Real Deal: The History and Future of Social Security" (Yale University Press, New Haven, 1999), pp. 41–42.
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Friday, August 14, 2020
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