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Week Ending August 7th

Markets
U.S. equity indices, government bond yields, and oil prices rose amid a slew of better than expected economic data, but tensions with China and continued stalemate on the latest coronavirus relief bill threaten to derail investor sentiment.  The sectors were all positive, led by industrials (+4.74%), financials (+3.26%), and energy (+3.12%), while defensive sectors like staples (+1.43%), utilities (+.97%), and real estate (+0.67%) lagged 


Economic Overview
July non-farm payrolls report illustrated a labor market recovering nicely but at a slower, bifurcated pace. More than 1.7 million jobs were added, most of which in the hospitality, government, and retail areas. Annual changes in unemployment among different ethnicity groups highlights the split nature of the recovery. 
U.S. manufacturing and services reports smashed expectations, returning to expansionary territory. Despite improving domestic data, unemployment claims remained stubbornly elevated, while the number of Americans claiming benefits rose nearly 400k to over 31 million. Despite executive orders over the weekend by POTUS, the inability of congressional leaders to secure a deal for additional relief could be detrimental to this reasonable nascent recovery. Chinese trade data exceeded expectations with stronger exports and mildly weaker imports
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401K plans Impacted

Cash Flow Challenges??
The COVID Pandemic has caused Plan Sponsors to Halt matching contributions. The latest look at what’s happening with 401k employer matching contributions during the COVID crisis shows that one in 10 plan sponsors have eliminated their matching contributions. With Cash flow being a challenge to most businesses, many plan sponsors have ceased making payments to 401K plans on a weekly basis deferring the contribution to the end of the plan year or suspending matching contributions entirely. We have suggested that plan sponsors craft their plan documents to allow for flexibility  
Generally, a reduction or suspension of safe harbor contributions may only be made in accordance with applicable regulatory requirements. However, contributions made on behalf of HCEs are not included in the definition of safe harbor contributions. Therefore, as explained in the Notice, a mid-year reduction or suspension of contributions made on behalf of HCEs would generally not be subject to the special requirements for reducing safe harbor contributions. The Notice does make clear, however, that such a suspension or reduction requires that impacted HCEs be provided with an updated safe harbor notice and election opportunity. https://www.irs.gov/pub/irs-drop/n-20-52.pdf


Overview in a Nutshell

The price of gold has risen significantly 
There has been some economic recovery, but it has slowed recently.
Unemployment data trends in mid and late July improved. The August data will likely show more stagnation as the political forces reversed or paused the business re-openings 
Bankruptcies of publicly traded companies continue their uptrend.

Soaring Price of Gold
So why is the price of gold soaring so much since the COVID Pandemic? 34% since January 2nd. Let’s take a look at what causes the price of gold to fluctuate.
Gold is the ultimate currency; It is accepted anywhere in the world and it can’t be manipulated by any government. Its supply is limited, growing at a rate of about 2% per year (new mining). Historically, gold has been a hedge against inflation. But it is also a safe haven from uncertainty. Gold is priced in dollars and the U.S. dollar is the world’s reserve currency. As the dollar falls in value to other currencies (the dollar index DXY) the price of gold is going to rise. When the U.S. treasury increases the money supply in a great proportion to the rest of the world currencies, the price of gold rises. While all countries are increasing their money supply during this pandemic to help manage economic stability, the U.S. is just doing it at a faster rate then the rest of the world. This uncertainty and excess creation of money is pushing golds price up   
There is a danger to the policies being pursued by the Administration, Congress and the Fed. If the U.S.’s money creation continues at a much faster pace than that of the rest of the western countries, there is a good chance that the dollar will continue to decline and loses its status as the world’s reserve currency. This would be a big blow to the U.S economy. Almost all international transactions are done in dollars, creating a demand for the currency and providing cheap financing for U.S entities. All this would disappear if the dollar loses its reserve currency status

Bankruptcies
Neiman Marcus, JC Penny, J Crew, Garden Fresh Restaurants, GNC, Brooks Brothers, Sur la Table, California Pizza Kitchen. Just to name a few iconic brands that have filed for bankruptcy this year. Publicly traded company bankruptcies continue their uptrend unabated. We are now trending for 277 for the year almost double that of 2019 (139)
One warning for those managing their own investment accounts is the action in the trading pits around speculative issues. With Las Vegas, local casinos and sports betting down there is a group of new traders in the market creating a lot of “false positives” in the market, creating momentum in securities that have no value. Much like the “Hertz phenomenon” – a bankrupt company whose worthless stock is bid up by day/momentum traders (sports bettors), and then quickly crashes once those gamblers get out. Now, the same has occurred with Kodak stock. Kodak is not currently BK, but it was. It was one of the original camera companies last viable in the pre-cell phone era, but the company isn’t in the camera business anymore. 
The company has come under scrutiny for the company’s lack of a track record in pharmaceutical production and for the stock option grants given just prior to the announcement of the $765 Million loan under the Defense Production Act. The stock’s roller coaster ride took it from $2.62 on July 27th to a high of $60.00 on July 29th. At the time of this writing the stock is trading at $10.14. Our point be careful of getting caught up in the hype.

What else is Trending
Bank Lending: According to the Fed’s latest Senior Officer Loan Survey, nearly 75% of banks have tightened credit standards of Commercial and Industrial loans, for Commercial RE loans, and for Credit Cards (see chart). For auto loans, the survey said nearly 60% have tightened. This can’t be a surprise. Banks always tighten credit during recessionary periods (when lending is most needed!). That makes the recovery much more difficult to sustain.

In the latest high frequency data releases, the Johnson Redbook same store sales survey for the week ending July 25 showed a -8.7% Y/Y result, a fall from the -5.7% of the June 27 week.
The NY Fed’s weekly economic activity index was -7.0% Y/Y in its August 1 reading.
Q2 S&P 500 earnings, through August 1 (63% reporting) are off -36% Y/Y with revenues down -9.6%. (Hard to believe that the index is a hair’s breadth from a new all-time high – could it be that all that money printing is having an impact?)
TSA checkpoint data for August 6 was at 743,599. That’s down -72.5% from the 2,707,986 travelers on that same date a year earlier. So people are not traveling just yet. However, it is an improvement from mid-June (about 500,000 per day) or mid-May (250,000).
PMI’s (Purchasing Manager Index): In the U.S., the ISM Manufacturing PMI was 54.2 in July (52.6 in June). The ISM Nonmanufacturing PMI was a hefty 58.1 in July (57.1 in June).  
Be careful in interpreting these numbers. The PMIs only measure expansion/contraction from the prior month. It does not measure or imply levels of activity. Let’s assume that in the prior month business for a reporting company was cut in half. That company was reported as negative to ISM which gathers up all the positives and reports them as a percentage (i.e. 54.2 means 54.2 percent of the reporting businesses were expanding in the month).  
One of the best indicators for today’s world is the University of Michigan and the Conference Board’s measure of consumer confidence. Both measures remain near their April bottoms.





When you reopen your office these links may help
Below are some links to government websites with helpful information
https://www.cdc.gov/coronavirus/2019-ncov/community/guidance-business-response.html
https://www.osha.gov/Publications/OSHA3990.pdf
https://www.eeoc.gov/wysk/what-you-should-know-about-covid-19-and-ada-rehabilitation-act-and-other-eeo-laws

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