For the first time in months, data is beginning to improve. Where are we seeing green shoots?

Our Top Market Takeaways for June 5, 2020.

 

Markets in a minute

Thoughts on this week

 

Recent events are shining a bright light on the systemic inequities that black people and other minority groups in the United States have been facing for decades. Talking about anything else almost feels trivial right now. Racial injustice is a topic worthy of its own dedicated dialogue, and one for which a one-way channel like Top Market Takeaways feels insufficient. We encourage you to consider the findings of JPMorgan Chase Institute’s recent report “Racial Gaps in Financial Outcomes” and to explore the robust collection of literature, podcasts and films that discuss these issues and perspectives.

However trivial it may feel right now, we remain committed to keeping you informed of the latest developments in the investments landscape. The S&P 500 headed into Friday up +2.6% on the week and around 40% off its March 23 lows, while cyclically exposed areas of the market continue their very recent trend of outperformance. U.S. 10-year Treasury yields also rose more than 20 basis points to ~0.90%, suggesting a more optimistic view of the economy. And outside the United States, euro-denominated assets rallied on the back of the European Central Bank’s decision to increase its bond buying program and last week’s watershed European Union recovery fund proposal (the Stoxx Europe 600 finished the week +7.1% higher).

Markets have, for the most part, remained focused on the path of recovery as the economy awakens from its deep COVID-19-induced slumber. Encouraging news on that front has helped fuel gains. Below we explore some of the economic green shoots that are emerging in the United States.

 

Spotlight

Green shoots and ladders

 

Back in April, we wrote about the potential shape of the recovery, and concluded that it was likely to be “U-shaped”—meaning that as communities reopen, the resumption in economic activity happens gradually at first, as people remain hesitant to attend social gatherings, get on planes, and so on. We’re now at a point where the worst of the COVID-19 crisis may be behind us, and early signs of recovery are beginning to appear. Importantly, as states and countries across the world reopen, we haven’t seen a meaningful surge in new cases (but we are watching this closely).

Speaking specifically about the COVID-19 crisis, most things are still really bad in an absolute sense—hundreds of thousands of people around the world have lost their lives, tens of millions of Americans have lost their jobs, and trillions of dollars of market value have been destroyed. The fallout, in many ways, has been incomparable. But for the first time in months, data is beginning to improve.

In both the economy and markets, we’re seeing green shoots across a wide range of “alternative data” measures, such as the number of travelers passing through TSA checkpoints, driving direction requests tracked by Apple, and hours worked across industries:

The bar chart shows the % change in hours worked from the trough in April versus as of May 29 for a variety of industries. It shows that although some have recovered more quickly than others, all have improved from their lowest points.

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More standard economic indicators are showing the inflection as well. For example:

The labor market:

  • Still bad: Nearly 1.9 million more Americans filed initial jobless claims last week, marking the 11th straight week of claims coming in above one million. Continuing claims have come down from their peak, but are still sitting above 20 million.
  • But improving: The formal nonfarm payrolls report for May showed that the U.S. economy actually added 2.5 million jobs in May, bringing the unemployment rate down to 13.3% from 14.7%! This was a huge surprise—consensus expectations were calling for 7.5 million job losses, and for the unemployment rate to spike to almost 20%.
  • The takeaway: The data suggests that the labor market could already be turning around. April represented the single worst month of job losses on record, and May marked the single best month of job gains. It could take a while for the unemployment rate to fall back into the single digits, but this is a step in the right direction.

The line chart shows the U.S. nonfarm payrolls in millions from 2000 through June 5, 2020. It shows that the number has remained very consistent over time, until the largest single month drop on record in April and the largest single month gain on record in May.

Manufacturing and services activity:

  • Still bad: After falling off a cliff in April, U.S., European and U.K. Markit PMIs suggest that manufacturing and services activity remains in deep contractionary territory.
  • But improving: Readings for May showed the best month-over-month improvement in manufacturing and services PMIs across all three regions since their respective series began.  
  • The takeaway: Activity is beginning to come back online as communities reopen, but these indicators are still a far cry away from suggesting manufacturing and services are growing again.

The line chart shows three lines from 2017 through June 3, 2020: the composite PMI Diffusion Index level for the United Kingdom, the Euro Area and the United States. It shows that all three followed a similar trajectory, and have all started to increase after sharp declines.

Household spending and income:

  • Still bad: Household spending collapsed in April, falling at an annualized rate of -13.6%. Remember, consumption makes up roughly ~70% of U.S. GDP.
  • But improving: Personal income jumped +10.5%, and the household savings rate climbed to 33% in April (compared to 8% at the start of the year). Fiscal support measures seem to be having the intended effect of replacing lost wages during the lockdown period.
  • The takeaway: It seems that the hit to the real economy is a result of lockdown measures—not necessarily of people being strapped for cash. If this trend continues, it’s possible that typical characteristics of recessions (e.g., increased bankruptcies, lack of credit availability, etc.) may be less severe than usual.  

What to make of it all:

The conclusion from “The shape of the recovery” still holds. A rebound as we head into the second half of the year likely won’t be strong enough to make up for the nosedive in the first half. It could still take more than a year for U.S. GDP to return to 2019 levels. But! We believe the economy is likely to rebound much more quickly than it did after the Global Financial Crisis and Great Depression.

For markets, remember that investors tend to focus more on relative measures (better or worse) than they do on absolute ones (good or bad). Should they continue, positive developments like the ones mentioned above could put more wind in the sails of stocks that have been the “losers” of the pandemic— a trend that began to take hold last week.

We would be remiss not to highlight the risks. Psychological scar tissue could keep people out of restaurants, crowded stores and travel hubs for a while. Temporary layoffs could convert into permanent ones, and certain types of jobs may be forever eliminated. Second waves of infections still pose a threat. Racial injustice and associated protests could deepen political divisions and exacerbate economic devastation.

All this considered, our approach to investments is still cautious, but we’re eagerly watching for new opportunities as they arise.

 

All market and economic data as of June 2020 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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