Market Commentary 08/7/20

The U.S. economy continued to make a comeback with 1.8 million new jobs created in July. Unemployment fell again to 10.20%, and the Labor Force Participation Rate rose to 61.40% from 60.20%. Just six months ago, we were writing about the lowest unemployment numbers of all time in the U.S. While this latest jobs report reflects a better-than-expected economic recovery from the March lows, many of the job gains in sectors such as travel, leisure, and restaurant staffing will most likely turn out to be transitory. Many U.S. businesses are operating at far below optimal levels and have probably laid people off again since the July print due to ongoing virus outbreaks across the country.

Many Americans, especially those in more public-facing jobs, may be back to work, but not at pre-COVID pay levels. These issues were probably behind the lukewarm response by Wall Street to the sizable job gains. The bond market remains skeptical as short-term and long-terms rates flattened further. Job creation from this point onward will rely on effective remedies as the economy will probably not be able to march higher under the shadow of fear of more shutdowns. Business and consumer spending will not normalize either. There is still a tremendous amount of uncertainty, but the scientific community is learning more about the virus daily and many potential treatments are just on the horizon.

While Wall Street grapples with forecasts, Main Street is concerned about paying the bills. More stimulus will be needed to bridge the millions of Americans who remain underemployed or out of work. This financial support is still being negotiated. Some clarity on the next round of relief should come in by next week, but not without the usual political bickering and finger-pointing. Should Congress not be able to come to an agreement, the markets could experience much greater volatility. For the moment, markets are assuming more stimulus is a near-certain outcome. However, even under a no-deal scenario, President Trump has stated that relief measures could be extended by executive order, giving Congress more time to come to terms with the Congressionally approved relief package. It is obvious that the Fed’s swift action and Congress’s willingness to open up the coffers helped to protect the country from diving into a deep depression. The trillions of dollars spent to date have been unprecedented and how we pay this back is a discussion for another day. 

Both the luxury single-family market end and suburban housing market have been a great asset class to own during the past six months. Low rates have spurred higher-end buyers into the luxury home market and suburban market, and it’s put more money into people’s pockets as refinance rates on many loan products have moved below 3.000%. Loan volume is at record levels and with forbearance and delinquencies tracking lower, banks are lending with more confidence and removing some of the more-restrictive COVID-19 overlays. This is helping our self-employed borrowers gain access to attractive rates and terms on more opaque loan requests. Unless you believe U.S. interest rates will go negative, any improvement in interest rates from these historically low levels will require lenders willing to take less yield to gain more loan volume. We continue to encourage all of our borrowers who have not refinanced within the last six months to review their loan documents to determine if a refinance is worthwhile. In many instances, better terms can be achieved.   

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