Recovery Takes Shape, But Uncertainty Remains

As the book closes on June economic data, it appears by almost every measure that the U.S. economic recovery is well on track. A sharp rebound — faster than economists expected, according to the Citi Economic Surprise Index — in May and June helped many sectors of the economy make up ground that was lost in March and April. Momentum is building, but the path ahead, at least in the short term, remains foggy.   

Just as we saw a sharp acceleration in June, COVID-19 cases around the country also rose sharply — and that’s continued through July. It’s pushed governors in some states to rollback reopening plans to ease pressure on hospitals, while other states are advancing further in their process. Initial jobless claims have stabilized, but they topped 1 million for a 17th straight week. What’s more, the additional $600 weekly unemployment benefit, included in the pandemic aid package, is set to expire July 31.  

Any of these factors could be a hurdle for this nascent recovery. However, over the next six to 12 months we believe markets, and the economy, will remain on an upward trajectory. That’s because scientists are getting closer to a vaccine, testing is progressing, treatment outcomes are improving, and we don’t anticipate another widespread shutdown. We also expect policymakers to inject another round of aid when it’s needed — in fact, Congress is slated to begin discussing a “phase four” stimulus package this week.  

As we wrote last week, expect to take two steps forward and one step back in the near term. However, we don’t think any future setback can unwind all the immense progress we’ve made. In March, we didn’t have a vaccine candidate; now, we have more than 150. In March, we didn’t know how to operate businesses safely; now people and operators are adapting. Progress may entail starts and stops, but it’s unlikely we’ll fully shift into reverse.  

WALL STREET WRAP  

Consumers Push Sales Higher in June: Consumers embraced a re-opening economy with open wallets in June, as retail sales beat expectations as they rose 7.5 percent. Clothing, electronics and furniture purchases fueled a second consecutive month of gains. Receipts at restaurants and bars also jumped 20 percent last month. Although the pace of growth in June slowed from May’s 18.2 percent month-over-month increase, that initial surge from the depths of April was an outlier, and not sustainable as sales normalize. At this point, top line retail sales have recovered 95 percent of their COVID-19-induced plunge, and retail sales (ex-gas) are up 27 percent in May and June — an all-time high. These are clear signs of consumer strength. 

That consumers are still shopping is good news for an economy getting back on its feet, as spending accounts for 70 percent of GDP in the U.S.  

Main Street Optimism Improves: The NFIB Small Business Optimism Index ticked up 6.2 points in June, as owners anticipate a short-lived recession. Earnings trends over the past three months, unsurprisingly, have been in decline, but the survey indicated a net 13 percent of owners now expect sales to improve in the near term, a positive, 37-point swing from a negative read in May. And, compared to May, more business owners plan to hire workers, expand capital expenditures and increase inventories.  

“We’re starting to see positive signs of increased consumer spending, but there is still much work to be done to get back to pre-crisis levels,” said Bill Dunkelberg, a chief economist at the NFIB.  

Builder Confidence Accelerates: The National Association of Home Builders’ confidence index rose 14 points to 72 in July. Limited supply of existing homes for sale has pushed up interest in new construction, particularly in the suburbs and smaller metro areas as homebuyers leave denser cities.  

A Rolling Recovery: It’s becoming clear that recovery timelines will be different across the country. The White House coronavirus task force has identified 18 states in a “red zone”, meaning they may need to rollback or slow reopening plans. However, while some states are regressing other are advancing — New York City is moving into phase 4 of its plan. All signs point to an uneven, though steady, recovery. That likely tempers the speed of the market advance in the near term, but we still see equities outperforming fixed income intermediate term. We think every investor, at this point, should ask themselves this question: Do you think the virus will have the same grip on the economy 6 to 12 months from now? In our view, the answer is, “No.”  

THE WEEK AHEAD  

Flash Data for Services, Manufacturing: As we mentioned at the open, we’re closing the books on June and looking ahead to key data in July, which could prove to be a critical month. On Friday, we’ll dig into both the Markit services and manufacturing PMIs. We’ve seen a steady improvement in both measures over the past two months as the economy re-opened and activity returned to a level of normalcy. Markets will be watching this one closely and stocks will likely move at the close of the week if there are any surprises.  

Two Comprehensive Check-Ups: This week we’ll also be watching for the Chicago Fed’s national activity index and the Conference Board Leading Economic Index. Both reports are broad-based measures of the economy that incorporate a handful of datapoints into a single, comprehensive number. Combining a host of variables into a single index helps smooth undulations in any single indicator to get a high-level view of the economy’s trajectory.  

Good News from Oxford? Medical journal, The Lancet, on Monday is expected to release early data on the efficacy of a vaccine developed by Oxford University and AstraZeneca. Sarah Gilbert is leading the research team, and her 21-year-old triplets (also studying biochemistry) decided to take part in the trial. Early reports suggest the drug candidate could confer “double protection” from the virus, which means it stimulated the body to produce antibodies and T-cells to combat the virus. The data could help markets open the week on a positive note.   

Other Potential Market Movers: This week we’ll get an update on existing and new home sales in June, and signs have pointed to a recovery in both this summer. Markets will also be focused, as they have been for much of the pandemic, on jobless claims. While weekly jobless claim totals fell sharply from the end of March and through May, the rate of decline has slowed in June and July. Finally, big tech will be in the spotlight this week as Amazon, Microsoft, Tesla and Intel (along with over 100 other companies) report earnings this week.   

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