Stimulus rumors remained the clear driver with the lack of any true progress causing the market to fall slightly on the week. Thursdays unemployment report brought the most promising reading seen since March, but some of that may just be the result of benefit limits. Find all of this plus additional insight into the struggles faced by many small businesses in this weeks Konvergent Market Update blog.
The S&P was down -0.34% on another stagnant week in the markets. Stimulus rumors mixed with an array of earnings reports led to a lot of uncertainty among investors. The week began with a considerable drop on Monday after reports suggested stimulus negotiations were making little headway. But following the buy the dip trend, the market gained back some of the losses Tuesday and continued to slowly move higher through the rest of the week. With a clear lack of investor conviction the price action remained very choppy and volatile in the second to last week before the election.
New claims decreased last week to 787,000. This was a solid decline of 55,000 over the previous week and represented the lowest level since March. Pandemic unemployment claims ticked up slightly to 345,440, bringing the total for new claims to just over 1.1 million. This was a good sign as new claims have been trending higher in recent weeks.
Continuing claims decreased further this week to 8.3 million. The steady fall in these claims over the past month has brought the total much closer to the previous years total of 1.7 million. If this trend continues throughout the winter, some may question the amount of hopeless people who have simply given up on the job search.
Total Claims for Unemployment from all programs came in at 23.15 million. This represented a drop of over one million in claims. The major catalyst behind this drop was a 1.2 million decrease in Regular State claims as many individuals hit their 26 week benefits maximum and moved to Pandemic Emergency unemployment. Overall this was a satisfactory unemployment report in a time where COVID cases continue to rise.
Existing home sales continued to spike higher, totaling 6.54 million. This was a 9.4% increase over the previous month and blew away analyst expectations. While this is a positive sign for the economy, it may be short lived. Housing inventory dropped 19.2% annually with only 1.47 million homes for sale. As a result, home prices are rising at a unreasonable rate and frankly unsustainable rate.
Small Business Struggles
Since the outbreak of the COVID-19 pandemic in February small businesses have undoubtedly been hit hard. With the nation on lockdown for a portion of the spring and many states maintaining capacity restrictions through the summer, many small business owners have seen their profits wiped away. While some were quick to adapt, others have had no choice but to rely on government aid. This solution was acceptable in the short term, but now it is October and the future for small businesses across the country remains wildly uncertain. The chart below shows the results of a survey conducted with over 7,500 small business owners. Of those surveyed, 34% claimed they will not be able to pay rent in October.
The reality is that this is probably worse as there are 25% fewer businesses open vs the start of the year so the survey may only be capturing business that are still operating.
The result of this is a surge in so called zombie companies. By definition, zombie companies are those who have higher debts than their revenue and must be bailed out to survive. While Congress initially protected these companies through PPP loan distribution, they are now locked in an impasse on additional funding. If no deal is reached soon, the number of zombie companies will undoubtedly continue to sky rocket.
However, throughout the pandemic, renowned economist Mohamed El-Erian has firmly made the claim that providing bailouts for floundering zombie companies is simply adding to the problem. In his own words, “They eat away at the dynamism of an economy, they misallocate resources and they eat away at productivity.” The chart below outlines the non-financial corporate debt to GDP ratio, with a clear surge over the past ten years from 40% to 55%.
The unfortunate reality is that no level of Fed spending can put an end to the pandemic effects. With limited clarity ahead, millions of hard-working small business owners will be kept up at night fearing what may come next for themselves and their families.
Articles of Interest
Stimulus Update – Another week of negotiations, another week without a stimulus agreement. With the election just over a week away, the hopes for a new stimulus package before Nov. 3 seem to be faint. Check out this article for the latest stance of each side heading into the weekend.
Pandemic Personal Finance – The pandemic has undoubtedly had a drastic effect on our personal finance with many people forced to cancel vacations and others at a loss for income. Check out this article for a detailed visual on the financial reality for many struggling individuals.
Market Correlations – Throughout the year major tech stocks have continued to drastically outperform the rest of the market. But is this kind of divergence normal in a recovering bull market? Check out this thought provoking article for a in depth comparison on how each sector has performed after the last three major market corrections.
Tech Earnings Ahead – Earning season heats up next week with the biggest names in tech reporting next Thursday. Check out this article for a preview of the most important things to watch for in this highly anticipated earnings season.
Social Media Post of the Week
Check out our recent blog on the incredible book, The Fourth Turning. Without a doubt one of the most mind blowing and jaw dropping books I have ever read.
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Non-Financial Story of the Week
My wife, Val, loves to make people happy with her food. She fell in love with cooking while we lived in Hawaii and her passion turned into a personal chef career. She had not been doing many events since the pandemic began but was asked to do a cooking class for a local dental office as a team building event. It sounds like it went super well and she has a couple more events lined up soon. I spoke with another client that also used a local personal chef for a small birthday event. Might be something to think about if you want to stay at home with a small group to bring in a personal chef to cook for you if you need a break from cooking at home!
The market is attempting to price in all the action with stimulus rumors, election drama, and earnings reports dominating the headlines. This week will be crucial is determining how voters view the economy as they go to cast their ballots. While the overall trend remains unclear, the next couple of weeks will likely bring a lot of volatile price action.
If you have any questions about any of the information in this week’s blog or what you should be doing right now with your personal and business planning, do not hesitate to reach out to us by sending an email to firstname.lastname@example.org or calling us at 253-236-7000.