Insights & Advice

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Markets recapture year’s highs

There was cause to celebrate this week. The S&P 500 Index finally regained all the losses incurred since them onset of the pandemic and then some. That, coupled with the weekly unemployment, also cheered investors.

For the first time since March, job losses were less than one million per week according to the U.S. Bureau of Labor Statistics. But being “less bad” is not the same as being out of the woods. That will take longer. How long? As long as it takes to develop a vaccine that will reign in COVID-19.

Personally, I like to think that the “V” in V-shape recovery now stands for vaccine.

Russia claims to have developed one such vaccine, which Vladimir Putin announced earlier in the week. Unfortunately, not a lot of details were made available, so investors have decided to take a wait-and-see attitude toward Russia’s supposed breakthrough. In the meantime, we have this Saturday’s virtual meeting between the U.S. and China’s trade negotiators to deal with.

The U.S. chief trade negotiator, Robert Lighthizer, and Vice Premier Liu He will review the progress of the Phase One trade agreement inked back in February. A lot has happened since then and it is anyone’s guess what the outcome will mean for both countries.

Sure to be high on the agenda for China negotiators will be the U.S. presidential executive orders that TikTok vacate the American social media landscape (or be sold to a U.S. company by next month). The same fate may await Wechat, another successful Chinese social app. But WeChat, owned by Shenzen-based Tencent, is the real sore spot for China and its one billion monthly users.

The majority of WeChat users reside inside China. It is a messaging app that combines the services of apps such as Facebook, Instagram and Uber. Users can play games, pay bills, send money, read news stories, chat, swap photos and send voicemail. The app has become an extremely important app for Chinese immigrants, students and visitors who want to communicate with their friends and families back in China.

WeChat also assists the Chinese government in keeping tabs on the overseas Chinese population. It has amassed the personal information of their population and can use the app to  threaten, intimidate and even silence dissidents. Secretary of State, Mike Pompeo, warns that the Chinese threat may be worse than that of a cold war, and says that President Trump’s executive orders are broader than just TikTok and WeChat.

China, while threatening to retaliate against these U.S. moves, has yet to show their hand. If the Chinese so choose, they could make it difficult for our companies with a large presence in their country, especially in the technology area. Apple or Google, for example, could be a perfect target in this escalating tit-for-tat between the two nations. They could make it more difficult for Apple to sell its products or even be booted out of the country altogether.

If so, it sure isn’t reflected in Apple’s stock price, or the level of NASDAQ overall. That may reflect investors’ lack of concern over this recent trade spat, dismissing it as mostly election rhetoric at its worst. The Chinese know that elections are just months away and boosting their purchases of agricultural products like soybeans now might convince the U.S. to step back from their actions in the technology area.

As it has done all year, NASDAQ continues to lead the markets higher.  However, we have seen some off-again, on-again rotation into more cyclical areas of the stock market. This “catch-up” trade, where investors search for stocks that are still lagging the overall gains in the market, could also indicate that the economy may be strengthening somewhat. The lack of a second stimulus deal could provide a headwind for the markets. I think the nation’s unemployed can get by for another 3-4 weeks on the savings they accumulated from the stimulus bill. But the markets still believe a deal will be done, possibly in September; let’s hope that is the case.

In the meantime, we are mid-way through August, which is usually a volatile month, as is September, and then we have the elections, so I have been expecting a hiccup or two in the markets going forward. I haven’t changed that view, but I do want readers to be prepared for that possibility.

Posted in At the Market, BMM Articles