Amid all the noise and the headlines, it becomes increasingly difficult to see some of the positives that surely have helped push the markets up in recent weeks. It is our goal to help parse through the data and slurry of financial information to offer insights into the economy and the markets during these difficult times.
The market has had a mind of its own recently. It may be shocking to wake up this morning to see some markets like the NASDAQ reaching new all-time highs given all the negative news, economic data, and seemingly endless Shelter-In-Place, but we think there is a rational explanation for that. The market can be thought of as a massive, forward-looking betting machine, and as it stands now that betting machine has its odds pegged to vaccine hopes and positive news from reopened economies.
Volatility has continued to spike intermittently over the past few months. Equally as jarring as the downside volatility is the upside volatility, much of which has subsided. A semblance of a trend has returned to the market, and the direction is (thankfully) up. This is due in part to the sheer size and swiftness of the stimulus we have seen out of both Congress and the Federal Reserve. Let us hope this theme continues as we head into second half of the year (1):
The market had another surprisingly positive week and looks to be on track to end this week in positive territory as well. This stems from some positive news, which we can break down across a few charts:
Consumer spending, which made up close to 68% of GDP in Q1 (2), has started to pick back up moving 0.5 percentage points (pp) last week:
The heaviest hit sectors have started to rebound significantly in more recent weeks, which indicates there is a meaningful pickup in economic activity as states reopen:
Among states that have reopened there has been a sharp increase in workplace and retail visits, but even in those states that have remained closed overall, or are slower to phase back in certain activities, there has been a steady increase in activity:
For those states that have reopened, some indicators point to a consistent and strong downward trend in positive tests and new COVID-19 cases:
As Patrick J. O’Hare of Briefing.com mentions, “The stock market hasn’t ignored any of the awful economic data it has seen since March 23. On the contrary, it has paid close attention to it. What it hasn’t done is get unnerved by it.” O’Hare goes on to make the often forgotten observation that the market is not living in today’s trying economic times, but rather, it is living in the future, when there is a vaccine, workers are rehired, earnings next year are positive and returning to more normal levels, and the underlying economic damage that has already been wreaked (and priced into the market) has begun its inevitable mend.
The narrative over the last few weeks has been mixed in both domestic and foreign markets. On the foreign side, plans announced recently to hold China accountable for its efforts to implement new national security laws in China were less stringent than initially anticipated (and there seemed to be no mention of backing down on a Phase One trade deal from either side). Even still, market participants can expect continued tensions between the U.S. and China in the months ahead that is sure to inject volatility in the market. For now, though, investors did not seem too unnerved by what they heard (or did not hear) during those announcements.
At the same time, Asian markets got a lift from the positive Chinese manufacturing Purchasing Managers Index (PMI) data for May, which may have broader implications for other nations as they reopen their own economies. European markets rode a similar wave and have benefited from relatively pleasing manufacturing PMI readings for May.
On the domestic side, there is a continued discourse that is centered on the widespread protests of George Floyd’s death seen across the country over the weekend and throughout this week. Many protests were peaceful, yet others featured acts that may slow the recovery efforts in affected communities. Capital markets are aware of the unrest but do not appear to have been upended by it. While things could change, it is not beyond reason to think that the capital markets’ attentiveness to the civil unrest indicates an expectation that it will compel Congress to pass further economic stimulus, and some large institutional players seem to believe there could be additional stimulus sometime in the late summer or early fall. (3)
While the unemployment data looks grim, it is helpful to breakdown the unemployment figures and recognize that large swaths of those currently unemployed are temporary, and we have seen the truth in this as unemployment figures announced last week on June 5th, which beat expectations even though there were some misclassification errors. It clocked in at about 16.4% versus the expected 19.8%:
We will have to see how these figures rebound as states reopen. There is likely to be a sheepish and slow return as states begin to reopen and businesses grapple with the economic impacts of the Coronavirus. CEOs and business leaders will certainly have some tough questions to answers like: Will we hire all staff back? Will we consolidate and no longer have a need for as many employees permanently? Will we slowly phase back in our work force to match demand needs?
Coronavirus cases continue to decrease across the globe, save for emerging market economies who are struggling more than their developed counterparts. Per Goldman Sachs Global COVID-19 Tracker, “In the US, confirmed cases increased by 20k (1.1%), roughly consistent with recent trends; active cases declined as one state began reporting recoveries. Results remain mixed across states, but infection growth generally appears stable outside the New York Tri-State Area. Confirmed case growth remained low in Western Europe (+0.3% day-over-day), and active cases are falling in several countries in the region. In contrast, case growth is still accelerating in many emerging market economies, especially in Latin America” (4):
It is our hope that these positive trends will continue as we head into the second half of 2020. The past few months have certainly been both unprecedented and extremely challenging. Private Ocean is here with you as we weather this storm together. We will continue monitoring the markets and the economy with the goal of keeping you informed and to be a resource for you. As the old Persian adage goes, “This too shall pass”. Should you have any questions, please do reach out to your advisor.
- Goldman Sachs Economic Research
- JP Morgan’s Guide to the Markets 2Q 2020
- Patrick J. O’Hare, Briefing.com (The Big Picture); Greg Valliere, AGF Investments Inc.; Goldman Sachs Economic Research
- Goldman Sachs Global COVID-19 Tracker; John Hopkins University Coronavirus data
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