Education and the reopening of schools came into focus this week. Approximately 40% of households have at least one minor child at home, which has ramifications for the labor market and consumers.[1] The path to mobilizing 56 million students back to schools is not clear cut, and a number of school districts are in the midst of announcing plans that run the gamut. Earlier this week, Los Angeles announced the decision to remain virtual despite the fact that a third of their students never logged on during the shutdown last spring (Baird-Strategas). The implications for students and families that remain at home are significant, and the pressure has been on to find ways to make education in the classroom a safe reality. The CDC is currently working on a set of new guidelines to help school districts accomplish this in the coming days. About 65% of universities and colleges have already announced their decision to bring students back in the fall, albeit with adjustments and cautionary measures in place.[2]
In the meantime, cases continue to surge, but mortality rates have remained flat over the past seven days. It is interesting to note that Miami-Dade County, which has been described as the new Wuhan or epicenter of the pandemic, never re-opened its restaurants and bars. California, the first state to shut down, has sought to reinstate a limited lockdown, which will have implications for its local economy. Recent data shows that states that emerged from lockdown earlier have consistently seen lower unemployment rates and faster recoveries.[3]
The stock market continued its rally this week, as economic data continued to show signs of improvement. At the close of the market on Wednesday, the S&P 500’s year to date return was flat for the first time since the crash in March. The NFIB survey of small business revenue expectations came out this week, showing the fastest snap-back on record, and a near complete recovery since first quarter of this year (see figure).[4] While it was highlighted recently in the press that 20,000 to 30,000 small businesses have experienced closure this year, it’s important to note that this is a fraction of the nearly 30 million American small businesses.[5]
Equity
As the sentiment among smaller companies improves, our rebalance in mid-May from large cap equities to the small cap sector is paying off. With Wednesday’s big move in small cap, our small cap sleeve has pulled ahead of both the large cap growth and value indexes, up 19.54% versus 15.27%, respectively, over this time period. Large cap technology enjoyed a strong rally from mid-May before correcting in the second week of June. Since that time, small caps have steadily gained traction as supportive economic data from the re-opening of the economy has rolled in. Of note, the Russell 2000 (small cap index) still has a good bit of room to run here as the index is still down nearly 12% YTD versus the Russell 1000 (large cap index) , which is nearly even for the year.
Fixed Income
The Fed owns $4.2 trillion of U.S. government debt, roughly 22% of the total outstanding. Since March it has purchased about $1.7 trillion in treasuries with the aim to improve market function primarily focused on the short end of the yield curve. With the short rates anchored near zero, the curve experienced some steepening YTD (2s/10s) of around 45 basis points currently. The yield curve flattened a little in June with COVID-19 cases increasing, but we expect that steepening to continue at a very gradual pace.
- Real yields remain in negative territory showing the easy monetary conditions
- The Copper/Gold ratio shows rates should be heading higher
- 10-year breakeven has been climbing off the lows of March – a sign that inflation is expected to increase, but still at a low level of only 1.4%
[1] https://www.wsj.com/articles/californias-second-shutdown-11594770566?mod=searchresults&page=1&pos=1
[1] Source: Baird-Strategas
[1] https://www.oberlo.com/blog/small-business-statistics
