The Washington PostDemocracy Dies in Darkness

The Finance 202: Economists talking up 'K shaped' recovery as stocks surge but inequality widens

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with Brent D. Griffiths

The S&P 500 just closed at an all-time high, ending the shortest-lived bear market in U.S. history. The broad-based index has rallied more than 50 percent off the low it hit in late March amid pandemic panic.

President Trump has called the surging market evidence of a strong economic rebound. That would come as news to the more than 28 million jobless Americans, the 29 million who have reported not having enough to eat in the previous week, and the growing numbers of people missing mortgage payments now that enhanced federal unemployment support has run out, along with an eviction moratorium.

Economists cite stocks soaring above widespread pain in the real economy as a vivid example of the best-of-times, worst-of-times dynamic emerging from the coronavirus pandemic. It is evidence, they say, that a stuttering recovery isn’t shaped like a U, a V, or even an L, as much as a K, whereby those at the top of the heap strengthen their positions while the rest see their fortunes further degrade.

“It’s one recovery for financial market investors and another recovery for everybody else,” says Joe Brusuelas, chief economist at RSM.

The stock market isn’t the only indicator of the divergent rebound: The housing market also tells the story.

Those with money to spend and looking to take advantage of low interest rates have set off a home-buying spree. Housing starts surged by 22.6 percent in July, blowing away economists’ expectations. And home builder confidence is soaring, rising for the third straight month in August to match its record high, according to an index of sentiment from the National Association of Home Builders. Online search traffic suggests buyers are replacing renters. From Oxford Economics chief U.S. economist Greg Daco: 

At the same time, the delinquency rate for residential mortgages shot up to 8.2 percent in the second quarter, up nearly 4 percent over the first quarter and the biggest such bump on record, according to the Mortgage Bankers Association. 

Lower-income borrowers are driving the trend. “Federal Housing Administration mortgages — the affordable path to homeownership for many first-time buyers, minorities and low-income Americans — now have the highest delinquency rate in at least four decades,” Bloomberg News reports. “The share of late FHA loans rose to almost 16% in the second quarter, up from about 9.7% in the previous three months and the highest level in records dating back to 1979, the Mortgage Bankers Association said Monday. The delinquency rate for conventional loans, by comparison, was 6.7%.”

Here’s a look at delinquencies as a percentage of total loans, again via Daco:

A staggered recovery in the jobs market also points to greater suffering at the bottom. 

As Heather Long recently reported, “Jobs are fully back for the highest wage earners, but fewer than half the jobs lost this spring have returned for those making less than $20 an hour, according to a new labor data analysis by John Friedman, an economics professor at Brown University and co-director of Opportunity Insights.”

The gap reflects how the new work-from-home economy has shielded those with college degrees, while those with less education have fared worse. “A Fed survey found that 63 percent of workers with college degrees could perform their jobs entirely from home, while only 20 percent of workers with high school diplomas or less could work from home,” Heather wrote. 

The market rally may be reflecting ugly truths about growing inequality.

Against the grim backdrop of a once-in-a-century economic shock, even some traders say investors pushing stocks higher have lost their moorings. The Standard & Poors 500-stock index is trading at 26 times annual earnings, putting the indexs valuation at a two-decade high. And investors have brushed off policymakers’ failure to reach an agreement on extending emergency aid programs, which denies critical fiscal support to an already-fragile rebound.

But a closer look at the market’s performance suggests investors are making cold-eyed calculations about the economy’s new winners.

Though the S&P 500 companies combined employ only one-fifth of the American workforce, as David Lynch notes, some of its biggest names are positioned to benefit from small-business closures by gobbling up their market share. 

Kohl’s chief executive Michelle Gass made that point explicitly on a conference call Tuesday, saying the retail giant is “actively pursuing opportunities to capture dislocated market share from competitors and store closures. … Even in the midst of the pandemic, we are acquiring new customers and see great potential looking forward.”

The company’s shares have lost half their value since the start of the pandemic after closing all of its stores for weeks. Per Lynch, investors are likewise punishing publicly traded companies — including airlines and hotels — that have suffered more acutely in the pandemic shutdowns. Meanwhile, “providers of videoconferencing software, cloud computing platforms, communications services as well as online retailers are prospering from the shift of tens of millions of Americans to remote work.”

 Or as Bloomberg's John Authers puts it, internet retailers are up 40% in round numbers since the previous top, and hotels, resorts and cruise lines are down by the same percentage.”

The picture is darker for small and midsize businesses.

Fully 91 percent of the midsize firms that sought federal help through the Paycheck Protection Program plan to seek forgiveness of their loans, according to a new RSM survey. But only 68 percent of them are confident they will secure it, a gap that could weigh on hiring, Brusuelas argues.

The first six months of the crisis gave an edge to big companies capable of shifting to digital operations, “and that was done at the expense of small and medium-sized firms” that are “hurting right now and waiting on further aid,” Brusuelas says.

Trump won’t acknowledge the split nature of the rebound. “The stock market’s rebound signals a V-shaped recovery, stronger than our competitors anywhere in the world,” he said at the White House last week. 

But Treasury Secretary Steven Mnuchin offered a different take. “It’s a two-tiered economy right now,” he told CNBC on Tuesday. While some larger firms are benefiting, “there’s plenty of small businesses that are on the ropes.” 

Money on the Hill

Pelosi favors slimmed-down stimulus now and more later.

But the House speaker reiterates that nothing new is on the table: “House Speaker Nancy Pelosi suggested that Democrats might be willing to make more cuts to their stimulus proposal to seal a deal with Republicans and speed Covid-19 relief, then come back after the November elections with additional agenda items,” Bloomberg News’s Billy House reports.

“But both sides in the stalemate over a stimulus bill appeared to be probing for openings for a break that could restart negotiations. [Mnuchin] and Senate Majority Leader Mitch McConnell said Pelosi’s decision to break out $25 billion in funding for the Postal Service from the original Democratic relief plan as an opening for talks.” 

Senate GOP to offer $500 billion package. It will include extended benefits for the unemployed and small businesses, the AP's Alan Fram reports. “The measure will also include $10 billion for the embattled Postal Service, said one top GOP aide." 

“With Democrats demanding that bargainers piece together a wide-ranging measure, the trimmer package emerging from McConnell and other top Republicans seems to be an effort to show voters what the GOP would favor enacting quickly. With the party’s presidential convention next week, the measure could give Republican senators facing difficult reelection races this fall an opportunity to vote for a relief measure with popular provisions, even though it would probably be blocked by Democrats demanding a more generous bill.”

Business leaders say they are unlikely to implement Trump’s payroll tax order (Tony Romm)

Coronavirus fallout

From the U.S.:
  • At least 5,452,000 cases have been reported; at least 168,000 have died
  • Two more universities pull back from in-person classes: “The University of Notre Dame is putting face-to-face instruction for undergraduates on hold for at least two weeks after the number of confirmed coronavirus cases rose to 147. Michigan State University also announced a pivot to virtual learning," Antonia Noori Farzan, Jennifer Hassan and Rick Noack report.
  • Apps designed to track covid struggle amid privacy concerns: “A global wave of experimentation in using smartphones to combat the spread of covid-19 has stumbled over privacy concerns, security glitches and slow program rollouts, leaving dozens of initiatives, including in the United States, with little evidence of success,” Craig Timberg, Steve Hendrix, Min Joo Kim and Fiona Weber-Steinhaus report.
  • Plane cabins could change dramatically: “Some new seat designs are squarely focused on physically separating passengers, while others aim to implement new technologies that will make it easier to sanitize plane cabins and give passengers peace of mind,” Shannon McMahon reports.
Walmart posts record online sales.

The nation's largest retailer beat Wall Street's expectations: “The near-doubling of online sales in the second quarter helped the retailer trounce Wall Street expectations for quarterly profit and same-store sales,” Reuters's Melissa Fares and Aishwarya Venugopal report.

“The results showed that the unprecedented spike in demand seen by big-box retailers at the peak of the coronavirus lockdowns has remained strong even as restrictions ease, with shoppers using their stimulus checks to shop for discretionary items like sneakers and clothes.”

  • But spending dropped as stimulus checks ran out: “Now, the retail giant is waiting to see if the government will put more cash in consumers’ pockets and give the company another bounce — or if it will have to rely on other pandemic-related trends to buoy sales, such as Americans cooking at home and fixing up their yards,” CNBC's Melissa Repko reports.
More from the corporate front:
  • Boeing to offer second voluntary layoff plan: “It will be offered to employees in the commercial airplanes and services businesses as well as corporate functions, chief executive Dave Calhoun wrote in a note to employees, a copy of which was seen by Reuters,” Bhargav Acharya reports.
  • Home Depot posts record sales as demand surges: “The company’s same-store sales jumped 23.4 percent in the second quarter, surging past analysts’ average estimate of a 10.5 percent rise, as the home improvement chain emerged as one of the corporate winners during the pandemic,” Uday Sampath Kumar reports.
Around the world:
  • Young people are emerging as main spreaders of the virus: “The World Health Organization warned that young people are becoming the primary drivers of the spread of the coronavirus in many countries — a worrisome trend experts fear may grow in the United States as many colleges and schools begin to reopen. Many nations in Asia, which had previously pushed infections to enviably low rates, have experienced surges in recent weeks at the same time that the age of those infected skewed younger,” William Wan and Moriah Balingit report.
  • Europe is reimposing restrictions amid rising infections. “In France, where masks are already mandatory on public transportation and in shops, the government said that it would soon also become compulsory for people working in offices to wear face coverings to prevent transmitting the virus to colleagues,” Jennifer Hassan reports. “Italy and Spain ordered nightclubs to close this week amid rising infection levels among young people, as Germany reported a rise in cases linked to people returning from high-risk vacation hot spots."
  • The Philippines is lifting its lockdown even as cases rise: The country “has reported some 173,000 coronavirus cases — the highest in the region — and more than 2,700 deaths. But with concerns growing about the economic costs, President Rodrigo Duterte announced a ‘refreshed’ approach to the pandemic this week,” Regine Cabato reports from Manila.

When superpowers collide

Trump says he canceled talks with China. 

His latest comments come amid rising tensions. “Trump said he called off last weekend’s trade talks with China, raising questions about the future of a trade deal that is now the most stable point in an increasingly tense relationship,” Bloomberg reports. "'I canceled talks with China,' Trump said Tuesday in Yuma, Arizona. ‘I don’t want to talk to China right now.’

“The phase-one trade deal, which came into force in February, had called for discussions on implementation of the agreement every six months. Chinese Vice Premier Liu He was supposed to hold a video conference call with U.S. Trade Representative Robert Lighthizer and [Mnuchin], but it was postponed indefinitely. On Wednesday, Chinese Foreign Ministry spokesman Zhao Lijian deferred comment to the ‘competent department’ when asked about Trump’s remarks on the trade talks.”

Pocket change

Wall Street presses GM to spin off electric-vehicle business.

The goal is to better position a rival against Tesla: “The new company would likely be valued at a minimum of $15 billion to $20 billion, and could potentially be worth up to $100 billion, according to Deutsche Bank analyst Emmanuel Rosner. GM’s total market cap currently stands at $43 billion,” CNBC’s Michael Wayland reports.

“GM shares closed Monday up 7.7 percent after Deutsche Bank upgraded its short-term rating on GM to a buy and were little changed in midday trading Tuesday. Speculation about a potential spinoff of its electric vehicle operations has been growing since the automaker’s second quarter earnings call on July 29.” 





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Bull session

The roll call vote gave each delegation an opportunity to showcase itself during the second night of the Democratic National Convention on Aug. 18. (Video: The Washington Post)