The Pulse – What’s happening in the Economy and the Capital Markets: 9/28/20 – 10/2/20


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The Pulse – What’s happening in the Economy and the Capital Markets: 9/28/20 – 10/2/20

Executive Summary

The markets moved toward both more risk and a desire for income during what is expected to be a volatile Q4.  Companies globally set records for debt issuance, adding cheap debt to balance sheets to provide cash to weather what may be a challenging economic environment after government stimulus is exhausted.

The economy does continue to improve, however, there are continued signs that the pace of improvement is slowing, with small businesses being particularly vulnerable.

Good news! We saw a highly regarded private equity firm state that their data on returns for portfolio companies supports that diversity in leadership generated better results.

The Markets

Despite a volatile week with the first Presidential debate and subsequent COVID news in the Executive and Legislative branches, the market embraced more cyclicality with the Russell 2000, Dow Jones and Emerging Markets performing the best. Oil continued its weakness on the back of BP’s comments last week that the globe may have experienced peak oil demand and was shifting toward a greener strategy.

The volatility had investors embrace sectors with higher dividends such as Real Estate, Utilities and Financials were the top sector performers in the S&P 500 while Technology and Communication Services (e.g. Google) performed poorly.

The Pulse chart 10.4.20 1

Source: Bloomberg

Corporate borrowing – investment grade and high yield – reached records in September. This was a U.S. and a global record for one month.

  • U.S. companies sold more debt in Q3 than ever before as well as companies take advantage of investors craving yield with government bond yields as such low levels.
  • For companies able to issue debt, they will have the cash available to weather any economic volatility in the uneven pace of the recovery.

Palantir – the highly secretive data analytics company backed by Peter Thiel that located Osama Bin Laden – went public this week via a direct listing (see: a Few Stories that Caught My Eye) that marginally disappointed investors.

The Economic News

As we have written previously, the Consumer Activity continues to move in fits and starts – with no clear direction.  As the Dallas Fed’s Mobility & Engagement Index highlights, there appears to be marginal improvement since early July, however it has been volatile without any clear trend.

Dallas Fed Mobility and Engagement Index

Homebase data supports this trend

Homebase, a software company that provides cloud-based time tracking tools for small business produces a monthly Main Street health report from their user base of 60,000 businesses and over one million active employees. Homebase’s September report supported the Fed’s data. 

High Frequency Data

The high frequency data is continuing to flash green with month over month and weekly improvements, such as restaurant diner volumes, however slowing railcar traffic and demand for gasoline signal that mobility and transporting volumes are slowing.

One way to measure economic activity is the Chemical industry’s monthly Activity Barometer Index, as chemicals are behind much of the economic activity in the US.  Similar to the Leading Economic Indicators we looked at recently, the CAB Index is signaling growth, however at a much slower pace going forward.

Chemical Activity Barometer Index – % Change Month Over Month

3 Key Economic details released this week were:

  1. Fed rate reduction is having a positive impact where financing is important:
    • Pending Home sales – very strong – +8.8% vs. expected 3.1% and August’s +5.9%.
      • Up 20% vs. last year.
    • Auto sales – very strong – 16.3m annual rate vs. expected 15.7m and August’s 15.2m
  2. Manufacturing is improving but expect it to improve at a slower rate going forward:
    • ISM Manufacturing – showed expansion but was below expected levels and August’s levels
      • New Orders were notably weaker than expected, down >10% from August.
  3. Conflicting Consumer Data – increased spending on lower-income
    • Personal income fell – 2.7% which was more than expected and change from the positive 0.5% increase in August. This relates to government unemployment benefits expiring and pressures the Federal Government to agree on a new plan.
    • Personal spending increased – 1%, higher than expected, but less than August’s increase.

Focus of the Week – The Labor Market

We received several key Labor reports this week – the picture they painted is disappointing as initial and continuing unemployment claims remain high, workers are dropping out of the workforce and smaller employers are keeping worker hours flat.

The weekly initial and continuing claims showed a week-over-week improvement. However, the numbers are still persistently high, painting a picture that employment is not improving meaningfully.

After a week’s decline, the number of people filing new Pandemic Unemployment Assistance increased – which is a negative.

The Employment Report – which provides the unemployment rate – was mixed, though economists considered it generally disappointing.

  • The unemployment rate was 7.9%, down from August’s 8.4% (on the surface, this is good).
  • However, some of the decline is attributed to people dropping out of the workforce (a bad sign) – labor force participation was just 61.4% – down from August and well below what economics were expecting since they expected participation to increase.
  • Most of the employment shortfall was in government jobs; the private sector came in as expected.

The economy lost 22 million jobs in March and April. The current shortfall is at 10.7 million, meaning that we have recovered just over 50% of the jobs over 6 months.

  • The concern here is that the job losses since February are turning into permanent losses.
  • The number of workers out of a job for more than six months showed the largest monthly increase on record.

Homebase employment data in their September report also shows stagnation in small business employment.

A Few Stories that Caught My Eye

  • CEO of Private Equity stalwart the Carlyle Group says its portfolio companies that are more diverse grew 12% faster than its other companies (Link)
  • 74% of Small Business Owners Took On Debt to Offset COVID-19 Financial Losses (Link)
  • Investors and Infidelity in the Executive Suite – companies headed by affair-seeking types were 69% more likely to restate earnings and more likely to be sued for securities fraud (Link)
  • Palantir – long-awaited listing had a very anti-Silicon Valley spirit to it (Link)


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