News & Insights

The following has been compiled from information and comments provided by the investment professionals of Frost
Investment Advisors:

Changing Optics…

Another week of better news helped guide the market higher, as most major equity indexes and sectors moved furtherinto positive territory. The broadening equity revival was not specific to the domestic markets either, as performance strengthened across several European and Asian exchanges, the most notable being Hong Kong, Japan, Germany, Spain and Italy. Although the technology and communication services sectors were the laggards last week (as was the case for gold, silver and Treasurys), they, along with the health care, materials and consumer discretionary sectors had already bounced back for the year, erasing their initial losses from the COVID-19 induced sell-off in late March. And though there was an uptick in Treasury yields, today’s rates still remain at or near historic lows.

Some positive headlines for the week tracked with the market momentum, but unfortunately, success closing the gaps in the stimulus packages from the two houses of Congress wasn’t one of them. Today, an approximate $2 trillion gap between the House and Senate proposals still exists in the effort to bridge lost wages and provide unemployment assistance from COVID-19 job losses. Through last Friday, the markets have discounted the impact of the impasse. When, or if, that attitude or level of concern changes remains to be seen. From a market perspective, loss in income support equates to uncertainty in retail sales, debt payments, personal and corporate bankruptcies, and more. House members have been called back to Congress this week to address problems at the postal service, so hopefully this will be a topic for discussion as well.

For now, the economic news continues to improve, albeit on a relative basis. On an absolute basis though, the labor markets, which bore the brunt of this year’s global pandemic, continue to weigh heavily on a recovery. Losses are still unfathomable, as have been the efforts, or lack thereof, to bridge the gap for those unfortunate to have lost or been furloughed from their jobs. But a recovery is developing as the economy grinds through a cycle of start-up/scale-back efforts. This past week, signs of this grinding recovery were evident again as initial unemployment claims improved slightly, logging in at 963,000 instead of the expected 1.1 million for the week. That number is still high but is the first drop below the million mark in initial weekly claims filed over the past 21 weeks. The “good” news is that the number of job openings continues to increase, with June’s JOLT report reflecting an increase of 5.9 million available jobs. Other reports from the week were mixed, including updates on retail sales, industrial production and small business confidence surveys (NFIB). On the latter point, the preliminary data from the NFIB Business Optimism Index was down slightly from June, falling to an index level of 98.8 in July compared to 100.6 the prior month. With reports of increasing COVID-19 cases, the outlook for general business conditions over the next six months deteriorated 14 points to 25 percent, and the number of owners thinking it's a good time to expand dropped 8 points to 5 percent.

Looking at domestic manufacturing, the overall report is positive. July reports showed a positive pickup of 3 percent on a month/month basis, although still, not surprisingly 8.4 percent below the prepandemic high in February. One of the worst hit industries was mining (oil & gas), which is still down 18 percent from earlier in the year. The good news was auto manufacturing, which was up 28.3 percent for the month, essentially recovering from the COVID-19 shutdown. Despite the pickup in autos, fabricated metals manufacturing still has a long way to go, off by 10.2 percent compared to last year. For the airline business, we need to see a dramatic increase in passenger traffic to boost aerospace manufacturing, which is still off by 20.5 percent from a year ago. On a positive note from the traveler’s desk, TSA monitoring of passenger passthroughs hit 863,000 daily travelers on August 16th, compared to its lows of 87,000 in mid-April.

On the retail front, signs were positive from both the consumer’s perspective and corporate earnings outlook. Although last week’s retail sales report pointed to a slowdown from the prior two months, it was another sign that consumers are back spending at pre-COVID days. The differences are obvious, though, as brick-and-mortar sales have fallen to the wayside—down 43 percent by Morgan Stanley estimates— while online sales continue escalating, accounting for nearly 16 percent of all purchases. Shoppers were spending the most in electronics (+22.8 percent), gasoline (+6.20 percent), clothing (+5.7 percent) and bars/restaurants (+5.05 percent). What seems to have helped was the recent stimulus package that added the $600/week to unemployment benefits. Needed now is a similar package to continue bolstering out-of-work families and those retailers and markets that have become dependent on that economic support.