We’ve written quite a bit lately about the deterioration in high-frequency data. Indicators of mobility (such as auto and air travel, commuting activity, restaurant diners, etc.) leveled off in July due to the latest wave of COVID-19 cases. The strong rebound in the job market reflected in May and June jobs data has faded, based on the increase in continuing claims reported last week by the US Bureau of Labor Statistics.
The US dollar was remarkably strong during the first quarter of 2020, benefitting from the flight to safety and rallying to nearly a 10% year-to-date gain at the stock market’s low point on March 23. However, as equity markets have recovered, and the US has continued to fight the COVID-19 pandemic, the dollar has given up nearly all of those gains. We think this trend may continue, and if so, it would have important implications for a range of asset classes.
The gradual reopening of the US economy has started to lift Main Street sentiment from depressed levels, according to the Federal Reserve’s (Fed) Beige Book. Despite growing concerns about rising COVID-19 cases in several pockets of the country, economic activity has returned in most industries.
The US economy has made impressive progress in recent weeks. As the economy re-opens, the way we assess the recovery has changed. In March and April, we were looking for evidence that growth in COVID-19 cases was decelerating—which thankfully it did—along with evidence that a recession was priced into stocks and that stimulus measures were sufficient to get us through the crisis. We used our Road to Recovery Playbook, shown below, to help us determine how the market was progressing in its bottoming process.
COVID-19 has decimated global demand as lockdowns materially re-shaped consumer and business behavior. Even as states have begun to re-open, significant questions remain about how demand could recover. The May retail sales print provided one of the first glimpses of that answer, rising 17.7% month over month and marking the largest monthly gain since data began in 1992.
In many ways, what we’ve seen so far in 2020 has been both record-breaking and devastating. From the S&P 500 Index peak on February 19 to the bear market lows March 23, stocks lost 33.9%. Now, 50 trading days later, stocks have gained 39.6%, for the largest 50-day rally since the S&P 500 moved to 500 stocks in 1957.
Despite the gradual reopening of the economy in several states, sentiment on Main Street remains suppressed, as the effects of COVID-19 appear to be keeping a lid on American optimism in the most recent Federal Reserve (Fed) Beige Book.
Recent economic data confirms that the US economy has entered a recession, led by the consumer, which accounts for more than two-thirds of the economy based on gross domestic product (GDP). The consumer spending collapse was evident from March’s personal consumption expenditures data released last Wednesday, which showed a record 7.5% month-over-month drop in consumer outlays.
The Conference Board’s Consumer Confidence Index (CCI) for April came in 86.9, falling more than 30 points from the prior month. The monthly drop was the biggest for the index since 1973, reflecting the severity of the economic impact of COVID-19 containment efforts.
With 22 million jobs lost in the past four weeks, a record drop in retail sales, and huge drops in industrial production and housing starts, it is safe to say we are likely in a recession. Even the Federal Reserve (Fed) in the recent Beige Book said that “economic activity contracted sharply and abruptly.” We highly doubt the Fed would say that if they didn’t believe the economy was in a recession.