Tech Stocks, Jobs and Earnings All Conspire to Drag Wall Street Down
Wall Street took a hit in tech this week with Apple, Amazon and Microsoft all seeing losses. Stocks like Microsoft showed better-than-expected earnings in Q2, but its stock still faltered by 4% on Thursday, due to slowing transactional license purchasing and the lack of performance by subsidiary LinkedIn. The latter being tied directly to unemployment figures.
The Dow Jones was dragged down by more than 400 points Thursday as more earnings reports were made public and the Labor Department released its weekly jobs data. Stocks like Apple, Amazon and Netflix all saw drops with Tesla giving back 4.3% of its gains, too. Travel also took a huge hit, with companies like Southwest Airlines reporting a loss of $915 million in Q2. Equities opened down in early trading Friday on the follow of Thursdays losses.
Once again this week we are seeing initial unemployment claims above the one million mark with 1.4 million Americans filing claims. That is the 18th straight week of more than one million claims and it snaps a 15-week streak of declining initial claims. This is due in large part to a resurgence of COVID cases across the United States and the shuttering of businesses per state and local regulations. Treasury yields fell slightly in reaction to the news. The 10-year note yield dropped to 0.584% with the 30-year yield trading down at 1.274%.
Part of the bigger problem with unemployment is that many people may end up not having jobs to go back to. Recently, the business review app Yelp published a report about the number of businesses closing for good. “Even as total closures fall, permanent closures increase with 72,842 businesses permanently closed, out of the 132,580 total closed businesses, an increase of 15,742 permanent closures since June 15,” the report showed. “This also means that the percentage of permanent to temporary business closures is rising, with permanent closures now accounting for 55% of all closed businesses since March 1, an increase of 14% from June when we reported 41% of closures as permanent. Overall, permanent closures have steadily increased since the peak of the pandemic with minor spikes in March, followed by May and June.”
The restaurant industry has been hit particularly hard and, according to the Yelp report, has now passed retail stores with the most permanent closures.
Unemployed people in America have been supported by an extra stipend from the U.S. government in the form of an extra $600 per week on top of regular unemployment benefits. Senate Majority Leader Mitch McConnel says the GOP is ready to reveal a new version of a stimulus plan next week, but that basically guarantees that the $600 per week stipend will expire before the new plan is enacted. Treasury Secretary Steve Mnuchin says that the legislation would be based on ‘70% wage replacement’ while Republican party members say the whole package will add up to about $1 trillion in spending.
Tensions Flare Between US and China
Something else to keep an eye on is the rising tensions between the United States and China. This week the State Department ordered the Chinese consulate in Houston, Texas to close. A spokesperson for the State Department said the closure was necessary to protect “American intellectual property and the private information of its citizens.”
China vowed to enact firm countermeasures should the U.S. refuse to rescind the order quickly. The day before the instruction to close the consulate, the U.S. Justice Department accused two Chinese nationals of hacking into the computer systems of companies working on a vaccine for COVID-19.
Friday morning, China countered by ordering a U.S. consulate in Chengdu to close. There was a swift drop in Chinese markets after the move was announced.
Mortgage Lending Set To Hit 7-Year High.
Existing home sales made their biggest jump ever, forbearance rates have dropped to a two-month low and now, Fannie Mae is predicting mortgage lending to top $3 trillion this year. For 2020, housing is the silver lining.
Fannie Mae’s Chief Economist Doug Duncan is bullish on his 2020-2021 forecast. In an interview with HousingWire, Duncan said mortgage lending will reach $3.14 trillion this year, the highest level since 2003. In addition, he believes that interest rates will also keep going down, with the average rate touching 2.8%. This is all based on the belief that the Federal Reserve will stay its course in continuing to purchase mortgage-backed securities to the tune of $40 billion per month.
June saw the highest monthly gain on record for existing home sales, according to the National Association of Realtors. Sales for June jumped 21% compared to May, which is the biggest gain since the NAR began keeping the statistic in 1968. There is a lag in this data point as it represents contracts signed in late April and early May. The NAR’s chief economist, Lawrence Yun, said they’re seeing a trend in location, too. “The housing market is hot, red hot, based on the data and the anecdotal prevalence of multiple offers,” says Yun, adding, “The urban area is less hot. We are clearly seeing trends for smaller towns or suburbs.”
New home sales also saw a significant increase from May to June with a 13.8% increase month-over-month. The Census Bureau also reports the yearly increase was 6.9% over June 2019. New homes are still a pricey purchase, with median home sales coming in a $329,200.
What’s concerning is that, with the pace of existing home sales, inventory has dropped precipitously. The NAR reports the supply of existing homes dropped by 18.2% year-over-year. In June 2019 there were 350,000 more homes on the market than we see today. In addition, the Census Bureau reports a 4.7 month supply of new homes. That could force a compounding problem. As more people take advantage of historically low rates to refinance, fewer people are putting their homes up for sale. Also, construction was halted due to the pandemic, putting new homes behind schedule for completion. So as fewer homes are available for sale, and refinancing looks less appealing, that might become an issue for the housing market into 2021.
Another bit of good news this week is that the rate of forbearance has dropped to a two-month low. The overall rate of loans in forbearance has dropped to 7.8%, according to the Mortgage Bankers Association. Their survey also showed that GSE loans in forbearance, loans backed by Fannie Mae and Freddie Mac, dropped to a three-month low of 5.64%
Contributed by Greg Richardson, MAXEX Managing Director
Greg Richardson is Managing Director at MAXEX, LLC, based in Atlanta, GA. He has 30 years of experience in capital markets, including trading, banking asset and portfolio management, mortgage banking secondary marketing and accounting. MAXEX is the only platform in the mortgage industry to offer a centralized clearinghouse that enables buyers and sellers to trade anonymously with multiple counterparties using a single standardized