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.   

It is a twisted tale of two worlds as big tech stocks such as Facebook and Apple surge while unemployment claims nationwide increase over back-to-back weeks. The disconnect between Main Street and Wall Street could not be greater. The issues are compounded by uncertainty over when normalcy will return in the U.S. So many public-facing businesses are struggling (think travel, restaurant, gyms, malls). If you expand that thinking, it’s an even worse conundrum as the business that supports those businesses (think airline parts manufacturers, restaurant suppliers, cleaning companies, retail suppliers) are under great strain. GDP in the second quarter was the worst on record. While everyone expected this number would be awful, the worry now is that with unemployment claims rising the economic rebound could stall. Coronavirus cases are up and there is no clear cut strategy in place to address big issues such as whether schools will reopen, what sort of additional rescue package will Congress agree on, and companies’ actions if the pandemic lasts longer than expected domestically.

However, on the positive side, the U.S. consumer continues to spend money in the e-commerce realm, since brick-and-mortar businesses have been closed. The economy is sure to be impacted in the upcoming quarter as unemployment benefits and bonus COVID-19 benefits taper off. So far, the U.S. government has stepped up in a big way to prevent a major economic depression. It will certainly get more complicated as time goes on, especially with a presidential election looming. 

Interest rates have breached the .60% mark on the 10-year U.S. Treasury. There is no inflation and bond traders are not optimistic about the near-term economic recovery. These ultra-low rates make all types of financing attractive as both corporations and consumers refinance massive amounts of debt. Low-interest rates are also helping the housing market by boosting affordability. Lenders are also seeing a tapering off of forbearances and delinquencies on residential mortgages. Certain sectors of the commercial real estate market remain in deep trouble as retail stores and hospitality businesses have been hit hard by the pandemic. The good news is that Insignia Mortgage’s long-standing relationship with our credit unions, banks, and mortgage banks has proved valuable as we continue to fund almost all loans that we pre-approve.

Tech stocks fell in what has been a priced-for-perfection sector as coronavirus cases surge. Tech has led the way as many businesses have used technology for the current stay-at-home economy. However, the huge concentration of value within the FAANG’s (Facebook, Apple, Amazon, Netflix, Google) does create concentration risk. Valuations are for sure stretched in this sector.

June home sales shined and business activity picked up, both welcome signs of better days ahead. Additional stimulus will be needed to sustain the economy until the virus is contained, more effective treatments emerge, or vaccines are available. All of the aforementioned comments continue to weigh on the equity markets. Bond markets continue to trade in a much more somber forecast to equities as the 10-year U.S. Treasury hovers near all-time lows of ~.54%. For the moment, the surge in equities has helped keep consumers and business sentiment alive (better sentiment equals more spending) as the Fed’s do-whatever-is-necessary actions have secured the floor on equity/risk on assets. 

The Fed’s massive liquidity injections have also saved the non-QM mortgage market as lenders and investors look for yield. Mortgage debt is easy to understand and the collateral is real. With paltry AAA and government debt yielding well under 1%, more opaque mortgage originations that can generate yields above 3.500% are appealing. Insignia Mortgage is placing loans with several different types of investors from regional California banks and credit unions to mortgage banks. Bridge loans are also making a comeback with investors eager to put money to work. Government-guaranteed loans are priced at historical lows and with new technology streamlining the process, we can close these types of loan transactions in as few as 30 days.