August 4, 2020

The Markets

Last week delivered a mixed bag of financial and economic news.

As many expected, the U.S. economy did not fare well during the second quarter. COVID-19 lockdowns and business closings caused productivity to fall by one-third. Real gross domestic product, which is the value of all goods and services produced by our country, dropped 32.9 percent during the second quarter of 2020, reported the Bureau of Economic Analysis. During the first quarter of the year, productivity fell by 5 percent.

The Federal Reserve held its Federal Open Market Committee meeting last week. Fed Chair Jerome Powell committed to “…using our tools to do what we can, and for as long as it takes, to provide some relief and stability, to ensure that the recovery will be as strong as possible, and to limit lasting damage to the economy.”

Powell also said, “Elected officials have the power to tax and spend and to make decisions about where we, as a society, should direct our collective resources. The fiscal policy actions that have been taken thus far have made a critical difference to families, businesses, and communities across the country. Even so, the current economic downturn is the most severe in our lifetimes.”

Our elected officials were unable to reach an agreement about how to support unemployed Americans whose jobs disappeared because of COVID-19. Enhanced unemployment benefits and a moratorium on evictions both expired at the end of last week. Congress met over the weekend and officials indicated they had made progress in negotiations, reported The Washington Post.

Earnings offered a glimmer of positive news for investors. Al Root of Barron’s reported, “…companies are crushing overly bearish estimates…More than 300 [Standard & Poor’s 500 Index] companies have reported second-quarter numbers so far. About 85 percent are beating Wall Street earnings estimates by an average of 22 percent.”

Overall, blended earnings for the Standard & Poor’s 500 Index (S&P 500) has declined 35.7 percent. If that is the actual change in earnings for the second quarter, it would be the biggest year-over-year decline since the fourth quarter of 2008 when earnings dropped 69.1 percent.

The S&P 500 and the Nasdaq Composites both gained last week. The Dow Jones Industrial Index finished the week lower.

Stock market data table

Fast Food For Thought

In 1986, The Economist developed a tasty way to assess whether currencies are trading as they should be: The Big Mac Index.

In theory, countries’ exchange rates should allow a person to buy the same product – in this case, a burger – for the same amount of money in any currency. In reality, currencies are often undervalued or overvalued. When an analyst says a country’s currency is undervalued relative to the U.S. dollar, it means a burger costs less in that country than it does in the United States.

For example, in June 2020, a fancy burger cost about $5.71 in the United States. In Britain, it cost £3.39, which is about $4.46 using last week’s exchange rate. That makes a British burger a lot less expensive than a U.S. burger. If the currencies were aligned properly, the burger should have cost £4.34. So, the British pound is undervalued relative to the U.S. dollar.

In June, visitors to Switzerland paid more for burgers than they would have in the United States. A Swiss burger cost SFr6.50 or about $7.15 in June 2020. If the currencies were aligned, the burger would have cost about SFr5.19.

The cheapest burger in the world was found in South Africa, where it sold for 31.00 rand or $1.83 in June. If the currencies had been in parity, then a South African burger would have cost 96.97 rand. You also can buy a burger for less in China. The Economist explained, “A [burger] costs 21.70 yuan in China and $5.71 in the United States…[This] suggests the Chinese yuan is 45.7 percent undervalued.”

The Big Mac Index should be taken with a grain of salt. It’s an imprecise tool some economists find hard to swallow because the price of a burger should be lower in countries with lower labor costs, and higher in countries with higher labor costs. When index prices are adjusted for labor, the Thai baht and Brazilian real are the world’s most overvalued currencies relative to the U.S. dollar, while the Hong Kong dollar and the Russian ruble are the most undervalued.

Weekly Focus – Think About It

“There are basically two types of people. People who accomplish things, and people who claim to have accomplished things. The first group is less crowded.”

—Mark Twain, Humorist

Wishing you and your families well,
Sean M. Dowling, CFP, EA
President, The Dowling Group Wealth Management

Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.


  • Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
  • Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
  • The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
  • All indexes referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
  • The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
  • The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
  • Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
  • The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
  • The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
  • International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
  • Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
  • Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
  • Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
  • Past performance does not guarantee future results. Investing involves risk, including loss of principal.
  • You cannot invest directly in an index.
  • Stock investing involves risk including loss of principal.
  • The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Economic forecasts set forth may not develop as predicted and are subject to change. Investing involves risk including loss of principal.
  • The Price-to-Earning (P/E) ratio is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher P/E ratio means investors are paying more for each unit of net income, thus, the stock is more expensive compared to one with a lower P/E ratio.
  • These views are those of Carson Group Coaching, and not the presenting Representative or the Representative‚Äôs Broker/Dealer, and should not be construed as investment advice.
  • This newsletter was prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with the named broker/dealer.
  • The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
  • Consult your financial professional before making any investment decision.

Sources:

https://www.bea.gov/sites/default/files/2020-07/gdp2q20_adv_0.pdf

https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20200729.pdf

https://www.washingtonpost.com/business/economy/white-house-officials-democratic-leaders-convene-rare-weekend-talks-as-unemployment-benefits-expire-for-millions/2020/08/01/9637d21a-d3f8-11ea-8c55-61e7fa5e82ab_story.html (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/08-03-20_TheWashingtonPost-Both_Sides_Say_Progress_Made_in_Talks_on_Pandemic_Relief-Footnote_3.pdf)

https://www.barrons.com/articles/dow-jones-industrial-average-drops-42-points-as-investors-stay-wary-51596245732 (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/08-03-20_Barrons-Why_this_Rally_Still_has_Room_to_Run-Footnote_4.pdf)

https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_073120A.pdf

https://www.barrons.com/market-data?mod=BOL_TOPNAV (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/08-03-20_Barrons-Market_Data-Footnote_6.pdf)

https://www.economist.com/news/2020/07/15/the-big-mac-index (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/08-03-20_TheEconomist-The_Big_Mac_Index-Footnote_7.pdf)

https://finance.yahoo.com/currency-converter/ (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/08-03-20_YahooFinance-Currency_Converter-Footnote_8.pdf)

https://www.brainyquote.com/quotes/mark_twain_393535

ADV & Investment Objectives: Please contact The Dowling Group if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. Our current disclosure statement is set forth on Part II of Form ADV and is available for your review upon request.