Broker Check

Consumers Save, Slash Debt as Earnings Season Approaches

| July 13, 2020

At first, scientists told us we needed 15 days to slow the spread of the coronavirus, the virus that causes COVID-19. The medical experts have consistently lengthened this timeline, leading governments to shut down economic activity in the name of public health.

Societal safety is obviously critical. But, as new cases slowed, people revolted against these restraints and states began to open up.

Now we’re seeing a pickup in new cases and it’s causing politicians to reverse course on reopening, meaning some areas of the country are shutting down again in hopes of limiting COVID-19’s impact. Yet, even as new cases rise, the death toll has fallen considerably:

During these re-opening reversals, we must remember that a crushed economy is also a public health risk. Perhaps Americans realize this because as reclosures happen, it’s clear many people want to press forward anyway. This is exemplified by our weekly high frequency data analysis.

For instance, on July 5, airports welcomed 732,123 passengers, which is up from 607,540 on June 22. Additionally, gas usage is down only 10 percent from last year. Also, Apple mobility data have shown a 19 percent increase in people moving around since the low mark in April.

While many seem to think new COVID-19 cases and subsequent government closures will do the same damage to the economy as we saw in March and April, right now that doesn’t appear to be the case as closures so far seem to be more targeted.  After all, we just finished our second straight month of big job gains.

Since we see little likelihood of a broad nationwide economic shutdown, economic data should continue to improve going forward. Most importantly, the economy will continue to recover if we can open businesses on a more consistent basis because Americans have tons of cash sitting on the sidelines.

From the end of February through the week of June 15, the total deposits in savings accounts and retail money market funds rose by $1.6 trillion, to a record $12.6 trillion in total. Over the same period, the total U.S. aggregate monetary supply soared by $3.8 trillion for MZM or liquid assets, and by $2.8 trillion for M2 or nearly liquid assets, which is up 25 percent from last year.

With that increase in the money supply and the last few months of lockdowns preventing people from spending their paychecks and government stimulus funds, many have paid down credit card debt. After climbing for a decade to $1.1 trillion, net revolving credit card debt fell a record $84 billion in April:

To summarize, the biggest takeaways this week are the increased money supply and decreasing debt – these are both encouraging trends. The combination of consumers itching to spend money and companies adapting (like the rest of us) to limit losses and still grow drives our hopes of a sustained economic recovery.

The Real Fireworks Start on July 14

Even though the U.S. just celebrated its independence (with perhaps fewer explosions than normal), for investors the real fireworks start on July 14. That day marks the beginning of earnings season, which always commences with results from the largest financial institutions in the country.

Most market analysts will concede the genuine extension of the bull market has to include the financial sector at some point. But this will be our first real insight into the sector’s performance since the pandemic.

There’s probably enough additional firepower within the various branches of the federal government to keep the market from buckling like it did in March. That said, the upcoming corporate results will start to shape our view from a fundamental perspective for the latter half of 2020 and beyond.

It’s possible the beginning of earnings season could be the catalyst needed for the market to start taking some gains off the table. If so, that would coincide with our recent discussions of Map Signals’ Big Money Index (BMI) indicating a short-term dip:

But here’s the single most important thing to remember about the stock market – the game is rigged (please note the tongue-in-cheek tone). Call it whatever you want, but the fact is, based on the last 100 years, stocks go up.

So, if we know we should buy equities, the question becomes – do we have a shopping list ready for when there’s an impending pullback in markets?

Cornerstone does.

We’ve mentioned before that indexes are currently ebbing and flowing, resulting in an overall treading of water for markets. But under the surface, we’ve seen the shift in the BMI already. For proof, look no further than the BMI sector breakdown.

There have been clear cooldowns in the sectors that powered markets higher during this rebound. The following charts show buying evaporate in the consumer discretionary, financial, and technology sectors (rising green means increased buying, falling green means it’s slowing):

It’s obvious the powerhouse buying that drove market growth is slowing, or at least taking a breather. And that’s not necessarily a bad thing. It provides us an opportunity to buy when equity prices dip, otherwise known as a sale.

Don’t let dips discourage. Remember what legendary investor Warren Buffett said – “Be fearful when others are greedy, and greedy when others are fearful.”

Also look at what he does. His firm Berkshire Hathaway recently spent $9.7 billion on Dominion Energy’s midstream energy business, which operates in an uncertain (fearful?) regulatory environment.

Securities sold through CoreCap Investments, Inc., a registered broker-dealer and member FINRA/SIPC; advisory services offered by CoreCap Advisors, Inc., a registered investment advisor. Cornerstone Financial and CoreCap are separate and unaffiliated entities.