Chris Ratcliffe / Bloomberg News
Jobs
The Labor Department reported last week a reduction of 249,000 initial unemployment claims, bringing the weekly number down to 1.2 million for the week ended August 1st, the lowest level since the coronavirus hit the US in March. Likewise, continuing claims fell by 844,000 to 16.1 million for the week ended July 25. These are signs that the layoffs have abated somewhat, but we are still seeing historically high levels for the 20th straight week.
The latest jobs report showed that employers added 1.8 million jobs in July, bringing the employment rate down to 10.2%. Prior to the pandemic the rate hovered around 3.5%. The sectors that saw the largest growth were leisure and hospitality and retail , while total nonfarm payrolls edged higher to 139.582 million, although still lower than the pre-pandemic number, which was well over 150 million.
Stocks & Bonds
The positive jobs numbers contributed to the six consecutive weekly sessions ending in gains for equities. The S&P 500 and Nasdaq each added about 2.5% for the week, while the Dow gained 3.8%. These indices closed at 3,351.28, 11,010.98 and 27,433.48 points, respectively. They’re inching closer and closer to their previous all-time highs.
The 10-year Treasury yield has bounced back after reaching its nadir on Monday, when it settled at 0.515%- on Friday it closed at 0.562%. Prices fall as yields rise. This reflects the slight optimism created by the aforementioned positive unemployment claims and jobs news that came out this week.
The Dollar (+ Gold & Silver)
The ICE Dollar Index, which measures the dollar against a basket of other major currencies, notched its worst month in nearly a decade in July, dropping from a peak of 102.82 on March 20, during the onset of the pandemic, to a low on Thursday of 92.87. Contributing factors of course include the flood of US government spending as well as surging budget deficits, making it more likely we’ll be facing inflation in the near future and thus an erosion in purchasing power.
Investors are turning to alternative stores of value, including the euro, gold, and now even silver. Gold has since surpassed its peak in 2011 and is now sitting comfortably above the $2,000 per troy ounce level. As I write, gold futures are trading at $2,028.60. SPDR Gold Shares (GLD) and iShares Silver Trust (SLV) are up 34% and 57%, respectively, as investors continue to shift away from equities as an asset class toward “safe haven assets” such as bonds and precious metals. As far as diversification goes, gold would be a better bet as it is less correlated to other assets and is not necessarily tied to business cycles, whereas silver is a “byproduct of the mining of other metals such as copper and lead” and does indeed have industrial uses, such as in electronics and photovoltaic cells in solar panels, making it a bit more sensitive to market swings in general. In any case, many are still bullish on the “poor man’s gold,” with Bank of America saying on Thursday that “it is feasible silver reaches $35 in 2021.”
The current gold-to-silver ratio is at about 70:1, meaning it currently takes 70 ounces of silver to buy one ounce of gold. Historically this ratio has been 15:1, meaning if this ratio were to hold true, silver stands to appreciate by 4.7x, sending the price to $130.66. At its current level of $28 per ounce, it is still a little over half its previous high of $50 per ounce. As investors continue to hunt for inflation hedges, silver stands to benefit from those seeking alternatives to bonds and gold.
IPOs
Al Drago / Bloomberg News
Quicken Loans parent Rocket Companies, Inc. (NYSE: RKT) had its initial public offering on August 6th but raised less capital than initially anticipated. It had previously planned to sell 150 million shares at a price between $20 to $22 per share, with a potential total raise of up to $3.3 billion. Instead it price its IPO below expectations, offering instead 100 million shares at $18 apiece for a total capital raise of $1.8 billion.
Hoping to take advantage of the current tech trend where companies positioned to perform well in pandemic conditions (Zoom, Amazon, Google, at the like) are seeing their equity prices appreciate generously, investors instead saw the company for what it is- a mortgage lender at heart. The Mortgage Bankers Association is indeed expecting mortgage originations to hit their highest level since 2005 thanks to historically-low interest rates, but many are also expecting a wave of defaults as expanded unemployment benefits expired at the end of July as well as the moratorium on evictions of tenants who are behind on their payments. On Saturday the president signed a series of executive orders that address these and other issues, but they’re likely going to face opposition from Congress on the grounds that they are unconstitutional.
Rocket did see a rise in net income of 46% in 2019, and its subsidiary Quicken Loans does command an 8.1% market share in the mortgage lending space, beating out Wells Fargo’s 6.9%, but from my perspective, it’s all downhill from here for the company as rates don’t have much room to go any lower and may even rise if the inflation rate hits the Fed’s target of 2% in the not-too-distant future when economic conditions normalize (i.e., we get a better handle on the ongoing pandemic).