What Matters Most – July 2020 Economic Update with Brad Bolyard

Transcript

Announcer: Welcome to the “What Matters Most” podcast, presented by First United Bank & Trust. That’s my bank. Visit us today at mybank.com.

Eric: Hello, and welcome to “What Matters Most,” the podcast all about finances, community, savings, and security for you, your family, and your business. This podcast is brought to you by the helpful folks at my bank, First United Bank & Trust. I’m your host, Eric Nutter, and in today’s episode, what matters most is our monthly economic update. And for this discussion, I’m thankful to be joined remotely today by Brad Bolyard, portfolio manager in First United’s Wealth Management department. Hey, Brad, how’s it going?

Brad: Hi, Eric, nice to be speaking with you today.

Eric: Yeah. Yeah, happy to have you. And I appreciate you coming on to give us our monthly update. I know people tune in. We cover a bunch of different topics. But, you know, once a month, we always have our folks in our Wealth department to kind of inform us what’s going on in the markets, and right now, it’s still a tough time. The pandemic is still altering our daily lives. There’s a number of external factors all impacting the market so I’m sure it’s a mixed bag of bad and good news you’re about to give us. Why don’t we start off with the negatives and then we’ll end on a positive note? How about that, Brad?

Brad: Yes, the negatives. COVID-19. Well, the number of U.S. cases of COVID-19 edged closer to 3 million today, unfortunately. And intensive care units in Florida were filling up. The U.S. counted a record number of new cases of the deadly illness in the latest sign that the virus is far from contained. We do have some data from John Hopkins that shows 60,000 new cases were recorded on Tuesday, with Texas alone counting more than 10,000 new infections. There’s at least 52 ICU units in Florida that said they have reached capacity on Tuesday and that’s according to the Washington Post. There’s another 17 hospitals that said their regular beds were also full. The virus remains the most important driver though of economic growth over the next year. And while Europe and parts of Asia are controlling overall case levels, case counts in the U.S. and various emerging market countries continue to rise. There’s delayed reopening, and continued lockdowns, and reissuing lockdowns that will all have adverse effects on the path of economic recovery.

Of course, looking at the negatives, you have seen a lot of social unrest. There’s social unrest across the U.S. that’s added to the recession, and geopolitical headwinds already facing the Trump administration. There’s Democratic nominee, Joe Biden, he’s proposing raising the corporate tax rate from 21% to 28%, and a minimum alternate tax of 15%, and a minimum tax of 21% on foreign revenue. And his estimated total proposals would lower corporate profits by 15% in 2021. Of course, this is election year and there’s continue…to political news that you’ll see throughout the year that will have effects on the markets. U.S.- China tensions have been in the headlines and if these tensions continue, Congress is considering legislation that could lead to the delisting of Chinese securities traded on the U.S. stock exchanges unless the companies accept regular public review and oversight other accounting practices.

I do want to focus more on some of the economic data and some of the jobless numbers that we’ve been seeing, first on the negative side, initial jobless claims. They dipped to 1.43 million in the 7 days ending on June 27th. That was above the estimate of 1.38 million, coming off the 1.48 million in the prior week. And that’s according to our Labor Department data. The number of people receiving traditional jobless benefits meanwhile rose 59,000, that was within the week ending June 20th, to 19.29 million. These are known as continuing claims. This is the first increase after three straight weekly declines and highlights the jobless problem, likely exacerbated by the ongoing presence of the virus and its economic impact. This earning season could be a rough one. Current estimates see approximately a 40% drop in earnings for the 2nd quarter, with little to no guidance from company management teams and market volatility is expected to be elevated.

Eric: Yeah, and to add to that, the U.S.- China tensions, I know that in my house alone, the potential for TikTok to be banned in my teenager’s life had a major impact, so she’s worried about that one. Quite a few negatives there to report on. Are we seeing any positive signs that you can talk about?

Brad: A whole lot of positive signs really hit some strong headlines here recently, with the labor market that’s continuing to show signs of healing. The U.S. added 4.8 million jobs in June and that reversed a 2.9 million estimate. and the unemployment rate fell for the second straight month, 11.1%, and that was worse than the expected 12.4%. The broader U6 unemployment rate that includes the persons marginally attached to the labor force and part-time workers who want full-time jobs, that stands at 18% and that’s down from 21.2% last month. So the labor market is trying to strong size the healing, looking pretty good there with some of the jobs that were added in June, per some the analysts’ estimates.

Did you want to talk about some of the manufacturing numbers also? The institute for supply management’s manufacturing and non-manufacturing index rose into expansion territory actually in the month of June, continuing to trend higher from the March low. The manufacturing index rose to 2.6% from 43% last month: new orders 56%, production 57%, employment 42%, backlog of orders 45%, and new export orders 47% All climbed by large margins. Manager commentary on the manufacturing side was noted that they’re seen stabilizing or increasing demand but noted they’re remaining cautious on the outlook.

Now, when I do give out these percentages, please remember that any of those numbers showing percentage above 50 is considered expansion territory. So look at the non-manufacturing index. That jumped to 57.1% from a 45% in May, the single biggest increase since the survey was created. Production 66%, new orders almost 62%, employment 43%, backlog of orders 52%, and new export orders almost 59%, so a lot of numbers showing in the manufacturing and the non-manufacturing numbers above that key 50% level, meaning that we are showing expansion in the economy. On the non-manufacturing sides, respondents noted that business is picking up. There seems supply constraints and issues, but still concern about outlook due to COVID-19. Trump recently even said, “Manufacturing looks like it’s ready to take off to a level that it’s never been.” The President says a lot of that has to do with our trade policy and because we’re bringing manufacturing back to our country. The National Association of Realtors also pending home sales figures show the historic rise of 44.3% in pending home sales for May, as beginning expectations that called for a 15% rise on the spike came as buyers returned to the house new market, in spite of restrictions on open houses in many states.

I do want to touch on consumer confidence that rose in June. Of course, that was before today’s 3 million cases that are being shown of COVID-19 here in the U.S., but consumer confidence there in June showed a 3-month high as the reopening economy buoyed the spirits of Americans and the index of consumer confidence rose to 98.1% this month, from a revised 85.9% in May, and that’s according to a consumer confidence board.

Eric: Well, I mean, those are some strong positives so it’s not all bad news. It’s not all bad news out there. So, do you have any closing thoughts of some of the current market conditions for this month?

Brad: Yeah, definitely. I want to kind of summarize what we’re seeing and some of the strategy that we’re putting into play, some of our tactics based on the negatives and positives that we’re seeing in the news. Again, the first half of 2020 has been one for the record books. From new all-time highs at the beginning of the year to the quickest descent into a bear market in history, to the quickest recovery from our bear market in history, and we end the first 6 months of the year just 3% lower than where we began on the S&P 500. In the U.S., the number of COVID-19 cases hit new all-time daily highs multiple times in mid to late June and into the July 4th holiday weekend. Up to this point, hospitalizations have not followed the same path, as many testing positive are younger and age with less severe symptoms. And we continue to see a U-shaped recovery in the economy and expect the next few months will be a harsh struggle for the economy compared to the bounce back of the last few weeks as rising case levels cause reopening to slow and will reverse in some areas. Neo curve is positive in general, usually because of the large [inaudible 00:10:12] on the long end of the curve. The ten years only 0.679%, I believe that was around 0.65% when I looked earlier today. The thirty-year at 1.441%. The Feds says they plan to keep ratesslow with their whatever it takes mentality. Our analysts aren’t expecting inflation to be an issue throughout the year. They are neutral fixed income and maintain a neutral to modest overweight duration within our portfolios. Our focus is still quality investments to protect from default risks, particularly when looking at high yield. We are underweight high yield [inaudible 00:10:50] where we remain concerned that issuers are at the beginning of a prolonged downgrade cycle. We have also adjusted our equity allocation, locking in some gains as well as adding to our overweight in U.S. large-kept equities that we believe will continue to weather the storm of economic uncertainty going forward. We still do remain underweight equities but this is a modest underweight that we believe balances the more positive economic reports that are given in historical monetary combination with the looming political uncertainty in constant unfolding of the coronavirus story.

Eric: Great. Well, Brad, thank you so much for giving us that update. Thanks for joining me today and providing such helpful insights. If any of our listeners have questions, they want to learn more, what’s the best way that they can get the support they need?

Brad: Yeah, I mean, a lot of our lobbies have restrictions on them. But you can always go to our website @mybank.com/wealth. Find an advisor and ask questions. Of course, if you want to set up an appointment with one of our Wealth Officers and discuss the economy, or your account, or so on the wealth management side, please do so. That’s my number listed there on the bank’s website.

Eric: Excellent. Well, that brings us to the end of our show. You can always find more episodes by visiting mybank.com/podcast or find us on your favorite podcast app. You can always leave feedback, ask questions, or request a topic for us to discuss by sending an email to podcast@mybank.com. Thanks again for listening. We’ll be back next week with more helpful content but until then, we wish you the best in focusing on what matters most to you.

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