U.S. equity markets may have found support levels after a two-day selloff as stocks rebounded from early losses to close relatively flat to lower for the day. More political gamesmanship around a next stimulus bill made some noise in the intra-day trade, but there was no significant progress. Meanwhile, another 898,000 Americans filed for first-time unemployment claims last week — the highest weekly reading since mid-August. 

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Most Americans who received stimulus checks used them wisely (see below), but with more than 25 million Americans receiving some form of unemployment assistance and a sluggish job market, their savings may be dwindling as the pandemic stretches on.

Daily confirmed new cases of COVID-19 (7-day moving average)

Troubling signs of the virus resurging in major European cities are prompting new lockdowns in Paris and London. With most developed economies seeing strong economic rebounds of late, the trend we are seeing in confirmed new cases in Europe and the U.S. is very threatening.

CSI 300 Index, SPX, EU50 share price chart

China Rises to New Highs

China's stock market has been powering to multi-year highs lately as the country where COVID-19 originated has managed to mostly suppress it. The Chinese government has also encouraged citizens to invest and ran an advertising campaign earlier this year to promote its stock market. The CSI 300, an index of China's biggest companies by market cap, hit a five-year high this week, and in terms of market capitalization, it's at its highest level ever, according to Bloomberg data.

China's $10+ trillion stock market cap makes it the second-largest global stock market behind the U.S., and Chinese equities now account for 10.86% of the total world market cap.

While China and the U.S. have gained the most share of world market cap this year, the biggest losers have been Japan, the U.K., France, Russia, and Brazil. Brazil's share of world market cap has fallen sharply in 2020, from 1.26% down to 0.75%. The U.K. has lost a full percentage point of world market cap since the start of the year, falling from 4.01% down to 3%, according to Bespoke Investments.

Average Change in Debt / Average Debt-to-Equity

Debt Binge

The third quarter saw the largest debt issuance binge on record as companies went to the credit market to load up on cash at cheap rates to bridge the gap to the end of the pandemic.

Profitless Debt Seekers

$267 billion went to investment grade companies and $119 billion went to lower rated high yield companies. But Ehren Stanhope from Factor Investor points out that when divided into two cohorts, profitable and unprofitable companies, the unprofitable ones are taking on more debt with greater leverage. The chart above shows that we are in nosebleed territory when looking at the average debt-to-equity ratio for U.S. stocks.

What Could Go Wrong?

Typically companies that are over-leveraged don't perform well for investors. But these are not normal times and many of the profitless companies that took on debt are in growth mode, so no one is blushing. To wit, Ben Carlson, who writes the Wealth of Common Sense blog, notes that of the 416 money-losing companies in the Russell 3000 with a market cap north of $1 billion, the median return is 20% and 76 stocks are up 100% or more.

How households used their stimulus payments

Americans Put Stimulus to Good Use

Most stimulus recipients were on good behavior, according to the Federal Reserve Bank of New York.

After two rounds of surveys, the New York Fed found that as of June 2020, on average, 36% of the lump sum economic impact payments were put into savings, while 35% of the funds was used to pay down debt. (Read more here.)

What to Expect from the Next Round of Checks

When asked how they would use an additional $1,500 if received, respondents said on average that they would save 45% of the money, use 31% of the funds to pay down debt, and use 24% of the payment for personal consumption.