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Consumer Correction Coming?

July 16, 2020

This morning we got the weekly unemployment data. The initial jobless claims were 1.3 million, which while down from last week is still a big number. Many continue to use the declining weekly claims number as a sign of improvement for the US economy. But really, it’s just less pain, not an improvement.

However, on a trailing one-week basis, we also got the continuing claims. These were down to 17.3 million from the prior week’s level of 18.1 million. That’s better, but over 18 million folks are on unemployment benefits. And that is a whole lot of households in financial distress.

US Initial Jobless Claims (White) & Continuing Claims (Blue)—Source: Department of Labor & Bloomberg Finance, L.P.

One big help is the weekly additional unemployment payment of $600 from the US Treasury.

The Treasury has paid out the $108.5 billion additional assistance for nearly all of the reported data for June. And this follows payments of $93.6 billion in May and $48.4 billion in April.

All of the standard unemployment benefits and the additional payments have been a big help for US households on top of the one-off checks from the US Treasury early on.

And all of this assistance has also aided US consumer spending. Today, we also got US retail spending data showing that June sales climbed 7.5%. That was down from the monster 18.2% gain in May, but it’s still the second month in a row of recovery.

 

US Retail Spending Monthly Percentage Change—Source: US Census Bureau & Bloomberg Finance, L.P.

This is also showing up in another bit of positive news in Bloomberg’s Consumer Comfort Index that was released today at 44.3. It shows a continuation of improvement in US household current and prospective views on the economy and consumers’ willingness to spend.

Consumer “Comfy” Index—Source: Bloomberg Finance, L.P.

However, the Treasury’s $600 weekly payments will end in August, and that may well be bad news not just for unemployed households but for the US consumer economy.

Data from the US Census and Treasury show that for the trailing months when benefits were paid, those that were unemployed increased household spending by 10%. But employed household spending dipped. This suggests that consumption may drop in August and beyond.

This comes as paused unlocking or partial re-locking is hitting state and local markets with surging COVID-19 cases. This means fewer outlets for spending and an increase in layoffs complete with at least a partial re-expansion of remote work and stay at home practices around the nation.

The administration is working on getting either an extension or an adaptation of the Treasury payments both in weekly benefits as well as potentially another round of one-off checks. But it would need Congress to go along. It will be reconvening next week after its summer break.

I suggested my favorite defensive stocks for a COVID-19 resurgence in last week’s Digest. But I am also suggesting that without another relief package from the US Treasury, the resulting hit to the consumer sector of the US economy will mean some bad market news and a pullback in general stocks.

S&P 500 Index with Fibonacci Retracements & Moving Averages—Source: Bloomberg Finance, L.P.

From late May to date, the S&P 500 has been in a range as traders and investors take a step back from looking past the current mess and focus on what’s still challenging for the economy.

This is a good time to buy some more bonds.

Bond Buys for Right Now

Bonds have been very good performers with all of the recovery work by the Federal Reserve as well as the continued demand for US bonds both inside and outside the US.

SPDR Nuveen Bloomberg Barclays Municipal Bond (TFI) & Vanguard Intermediate-Term Corporate Bond ETF (VCIT) Total Returns—Source: Bloomberg Finance, L.P.

Quality US corporate bonds and municipal bonds remain in strong demand, and even with some new issuance, buyers have been pulling them into their portfolios by the truckload. And with no inflation in the US, corporate and municipal bonds provide better real yields than US Treasuries, since much of the Treasury yield curve is negative in inflation adjusted yield (real yield).

And with Fed support for bond prices and market demand, bonds will remain a safe haven for some time.

On the corporate bond front, I like the Vanguard Intermediate-Term Corporate Bond ETF (VCIT). Yielding 2.1%, it’s one of the simplest ways to own quality US corporate bonds. The ETF has returned 21.5% since March 19 to date and should be bought in a tax-free account.

For municipal bonds, I like the SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (TFI). Yielding a tax-advantaged rate of 2.0%, this ETF provides a great way to capitalize on income now and defensive gains to come. Returning 18.4% since March 19 to date, it should be bought in a taxable account.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life