Market Trends June 2020
How People Spent Stimulus Checks
The number one priority for 30% of people receiving stimulus checks was paying their bills, according to MarketWatch. Paying for housing, rent, utilities, cell phones and cable TV were the top choices, followed by purchasing essentials and “relief spending” on apparel, televisions, video games, sporting goods, toys and alcohol. Unemployment in 43 states set new records, reaching 28.2% in Nevada, 22.7% in Michigan and 22.3% in Hawaii. Analysts had originally speculated that people might use the substantial infusion of cash to fund big ticket purchases such as automobiles and appliances. Congress is currently negotiating a Phase 4 bill, but Capitol Hill analysts don’t think they will pass anything until at least June.
Mortgage Lenders Tighten Standards
Mortgage rates are at record lows, but lenders have put higher credit score and downpayment requirements in place and some have stopped issuing certain types of loans altogether. Industry watchers say that lenders have become risk-averse with Congress allowing millions of borrowers to delay monthly payments and policies implemented during the pandemic by mortgage giants Fannie Mae and Freddie Mac. One model shows that mortgage credit availability has plunged by more than 25% since the US outbreak of CV19. In March, riskier buyers could get a loan by paying a premium, but in many cases, they are now being denied. Wells Fargo increased its minimum credit score to 680 for government loans from the typical score of 580 and JP Morgan is requiring minimum credit scores of 700 and a downpayment of 20% on most mortgages, including refinances. Home equity lines of credit have also been suspended.
Buyers Priced Out in Major Metros
In 20 of the 50 largest US metros, list prices in the first quarter were more than five times the income of the median first-time home buyer. In addition, the number of active listings dropped by 19% compared to Q1 2019. First-time buyers are generally younger than repeat buyers, have lower incomes and potentially less robust credit histories, all of which can create obstacles in today’s market. The median first-time homebuying age is typically 33. In 39 of the 50 most populous US metros, home prices rose 4% during the first quarter compared to Q1 2019 and the number of active listings dropped an average of 19%. The average list price in Los Angeles rose 21% year over year to $953,000, making L.A. the priciest metro for first-time buyers.
The Race to be Last Back to the Office
Many white-collar companies are in no hurry to get employees back into the office. Google, Facebook and Zillow told employees they could work from home for the rest of the year. Amazon is saying October. Capital One said Labor Day, possibly longer. Nationwide Insurance is shuttering five offices around the country and having those 4,000 employees telecommute permanently. Outbreaks subsist in one area, only to flare up in another. Almost every day in May there were at least 20,000 new cases in the US. Analysts speculate that even when CV19 no longer mandates working from home, working remotely will likely retain a significant presence in corporate life. That will help shape the future of cities, retail and support services, businesses and the commercial construction and real estate industries. It will also change the culture at companies that have been building elaborate campuses designed to make people happy to remain at work. Working from home cuts the costs of commuting, gives employees more free time and is good for the environment. But it’s bad for businesses that depend on the morning coffee crowd, lunch hour dining and shopping and bustling happy hours and after work activities.
Building a Virus-Free Supply Chain
Amazon has had to quickly adapt their legendary supply chain to allow for the realities of keeping employees safe during a pandemic. Amazon’s warehouses and other processes are designed for the high efficiency that helps keep prices very competitive. But those same practices interfere with social distancing and constant cleaning and sanitizing. Amazon reports that they have had to create more than 150 new processes in order to adapt, from deep cleaning and distributing masks to employees to adding more than 1,115 thermal cameras and 2,298 handwashing stations. Amazon has also released footage of trials of robotic cleaners, which use UV light to eliminate the virus on surfaces. So far Amazon reports spending $800 million on such measures, all of which eat into profits. In fact, Amazon expects to invest all of their second quarter profits, estimated to be about $4 billion, in CV19 response. Up to $1 billion may be spent on their private testing project by the end of the year. Analysts speculate that one of the objectives is to create testing stations for Amazon employees that can return test results in minutes. Daily screening plus their current precise tracking and tracing of employees would ensure that any worker who comes into contact with someone who is infected can be quickly quarantined. Analysts say that Amazon is in a unique position to virus-proof their supply chain, because they control the goods coming into their warehouses, the warehouses themselves and product delivery. Markets punished Amazon shares after the news, but analysts point out that this type of large-scale investment when so many other companies are pulling back is typical of Amazon, and often produces game changing solutions and eventually big profits.
Online Retailers Back USPS Bailout
A powerful coalition of online retailers, including Amazon and CVS, plans to pour $2 million into ads opposing President Trump’s call for higher package delivery rates. The coalition is asking Congress to help support the Post Office. Many of the companies have already been quietly lobbying, but the president has said he will not sign any further relief package that helps the Post Office unless it raises rates. The companies involved say that in order to keep the market competitive and operations efficient, an affordable USPS is critical. Post Office losses more than doubled to $4.5 billion in the quarter ending in March. The USPS warned that the economic slowdown being caused by CV19 could severely hurt finances in the next 18 months. The Post Office has requested funding from Congress and unrestricted access to borrowing. The USPS Parcel Select business, which primarily handles ecommerce packages, delivered 2.9 million packages and brought in revenue of $6.8 billion during the fiscal year ending in September 2019. Reportedly, the USPS has launched a review of package delivery contracts with large shippers, including Amazon, UPS and FedEx. The Postal Service Board of Governors is made up of presidential appointees, and recently named Louis DeJoy as postmaster general. DeJoy is also the finance chair of the Republican National Convention. According to a review by the Postal Regulatory Commission, shippers get discounted rates for some US ZIP codes in urban areas, but not on roughly 23,000 ZIP codes outside of urban areas, where shipping is more competitive.
Forbes Global 2000 Reflects Pandemic
The CV19 pandemic has separated retailers into not only essential and non-essential but also into those who are structured to take advantage of the new normal and those who are not. Some of the factors include the immediate acceleration of curbside pickup, store-door delivery and ecommerce. Walmart jumped 10 spots to Number 19 on Forbes’ Global 2000 list of the world’s biggest public companies, as measured by a composite score of revenues, profits, assets and market value. Amazon gained six spots, coming in at Number 22. The Home Depot rose 20 spots to Number 106 and Lowe’s rose 60 spots to Number 173. Meanwhile, mall-based apparel retailers are struggling to just remain open, with pricey Neiman-Marcus and main street J.C. Penney both filing for bankruptcy protection.
Oil Crisis Impacts Economy
Oil prices turned positive again in early May after Saudi Arabia initiated voluntary cuts in production and helped ease the tension with Russia. However, global oil demand has plummeted by about 30% as the pandemic curtails movement around the world. Goldman Sachs predicted that oil demand will begin recovering quickly but will not fully recover due to less airline travel which results in lower demand for jet fuel. The oil and gas industry in the US is responsible for 10.3 million jobs and contributes 8% to GDP.
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