S&P 500 Completes V-Shaped Recovery

For months, market watchers speculated about the shape of the economic recovery. Well, at least from a stock market perspective, it’s a solidly V-shaped recovery — and then some. While the tech-heavy NASDAQ has already eclipsed its pre-COVID levels, the S&P 500 completed its V formation last week, setting its first record close since February (up more than 50 percent from its March lows).

Meanwhile, conditions in the real world may seem a bit disconnected from the robust recovery we’ve seen on Wall Street. Jobless claims are still elevated, and we haven’t exactly returned to the way things were in, say, January or February. But we’re adapting. The economy will look a little different than it did prior to the pandemic. Curbside pick-up, working from home and ecommerce are likely sticky trends that won’t fade — even when coronavirus does. But while some behaviors may evolve, people will still likely go out to eat, shop on Main Street and travel.

Change is disruptive, but our ability to adapt is a major strength of the U.S. economy. While the pace of recovery has been slower than what stocks reflect, remember that markets are forward-looking — expectations for 2021 are already priced in. While the rally has largely been driven by tech, we expect earnings growth will broaden to other sectors when the coronavirus is contained, and people begin venturing back out to stores, restaurants and travel.

WALL STREET WRAP

Builder Confidence at All-Time Highs: The housing market, by and large, has been a source of strength for economy throughout the pandemic-driven disruption. That trend looks to continue as the U.S. Home Builder’s Confidence Index soared to 78 (anything above 50 is positive sentiment), tied for the highest level in the 35-year history of the index. Housing starts and permits also beat expectations last week, while existing home sales surged 24.7 percent in July.

“Single-family construction is benefiting from low interest rates and a noticeable suburban shift in housing demand to suburbs, exurbs and rural markets as renters and buyers seeks more affordable, lower density markets,” said NAHB chief economist Robert Dietz.

Lumber mills are catching up with fresh demand after coronavirus-related closures slowed production, and that, along with tariffs, has caused lumber prices to rise — roughly 80 percent since mid-April. That could weigh on momentum in the short-term but may prove temporary as mills increase production.

Manufacturing, Service PMIs Show Strength: IHS Markit said its flash U.S. Composite PMI Index rose to a reading of 54.7 this month from 50.3 in July. That’s the highest read since February 2019 (anything above 50 indicates growth in output).

"Total new business rose for the first time since February and at a solid rate. Manufacturing firms registered a steeper expansion in new order inflows than in July, while service providers signaled a renewed increase in sales,” Markit said in its report.

Breaking down the two broader subcomponents: The manufacturing PMI hit 53.6 — its highest level in 19 months — while the larger services sector PMI reached 54.8. Both surprised strongly to the upside and are a clear signal of an economy returning to growth.

Fed Tempers Outlook: Markets wavered slightly midweek after the Federal Reserve released minutes from its July meeting. Fed staff members noted that the recovery in GDP and declines in unemployment were “somewhat less robust than in the previous forecast”, blaming the slowdown on the spread of coronavirus since mid-June. On the other hand, household spending bounced back faster than Fed leaders expected, recovering about half of its decline.

Something to watch in the weeks ahead: Some Fed officials thought the central bank should rewrite its forward guidance and make an official pledge to keep rates low until certain economic outcomes were reached. Although an agreement wasn’t reached, we expect the Fed to come out with concrete guidance on this front soon.

The Fed’s Open Market Committee meets again Sept. 15-16.

Weekly Jobless Claims Back Up: Initial jobless claims for the week ending Aug. 15 rose above 1 million, a week after dipping below that mark for the first time since the pandemic. The rise comes in the first week of claims data after the Paycheck Protection Program stopped accepting applications, perhaps underscoring the stress on small businesses. Continuing claims, or those receiving unemployment benefits for at least two straight weeks, declined by 636,000 to 14.844 million in the week ending Aug. 8.

Congress is still struggling to hash out a deal for a fourth round of aid. The additional unemployment benefit, which had been $600 per week, continues to be a major sticking point between Republicans and Democrats.

THE WEEK AHEAD

Pulling Out of the Recession? This week we’ll be paying close attention to the Chicago Fed National Activity Index (CFNAI). While this gauge doesn’t receive the same attention as, say, GDP or unemployment reports, it’s a helpful composite read of 85 economic indicators that help us judge the pace of economic growth. Any reading above 0 indicates the national economy is expanding faster than its historical rate. July is expected to reach 3.7. Now, what does that mean?

In April, when shutdowns exacted their maximum impact on the economy, the CFNAI fell to -18.09. If the index hits 3.7 as expected for July, that would mark three consecutive months above zero, and drag the 3-month average into positive territory. That would be one indication that the economy has pulled out of recession.

A Read on Consumers: Consumer confidence and spending reports for August and July, respectively, are set for release this week. Consumers drive the bulk of GDP growth and are a critical component of economic health. We’ll want to see if the logjam on aid in Congress and the expiration of benefits impacts confidence. Retail sales surpassed pre-pandemic levels last month, which means spending will likely follow suit.

Another Vaccine Round-Up: President Donald Trump on Sunday granted emergency authorization for a coronavirus blood plasma treatment. In a nutshell, plasma containing coronavirus antibodies from survivors is given to hospitalized patients to aid in their recovery. We’ll keep an eye on this and other developments on the vaccine and treatment front, and we’ll have a quick update in next week’s commentary.

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