More than half of U.S. states reopening
About half the U.S. states are reopening, with even California, which had one of the strictest lockdowns, relaxing some restrictions. After Friday’s horrific jobs report, showing a post-war high in the unemployment rate of 14.7% (with the actual likely 5+% higher) [Figure 3], you can understand why.
Market narrative running ahead of growth?
If there’s one thing 2020 has made remarkably clear, it’s that the market is not the economy. Last week’s performance is further evidence of that. The market decline we saw in March was one of the sharpest and most precipitous ever. It was also one of the shortest, due to massive intervention from the Federal Reserve and U.S. government. At this point, a lot of the “good news” is already priced into the market. We’ve already gotten the bump from the Fed stimulus and the quicker rebound being talked about. So while the Fed’s bazookas may have spared the market a lot of added pain, a truly robust return to growth is likely to be slow. After all, the economic impact of COVID-19 by many measures — unemployment among them — has been downright devastating.
While one can reasonably argue there is no correlation between GDP growth and market performance, at least not one that exists within any reasonable timeframe, last week’s catastrophic unemployment data may support a more bearish outlook on the future. If you think of output as (total number of employed people) x (how much each produces per hour), it’s not unreasonable to expect GDP will shrink. At the least, it makes one wonder whether the market, which has rallied largely on the Fed’s intervention, is running too far ahead of growth? Markets have thus far looked through this data. But to justify the current rally off the lows in March, we’ll need to see a quick reboot in activity.
Hard data coming up next
While uncertainty remains, we are getting more hard facts as time goes on. It will be important to assess whether the data supports the market’s narrative. In other words, as the economy reopens will consumers likewise start to spend money? Will businesses be able to stay up and running?
Here’s the data we’re looking at this week:
NFIB Small Business Optimism Index – A monthly survey of small business owners, the index saw its biggest decline ever last month as small business owners struggle to keep their doors open. The survey tracks small business owner responses related to uncertainty, expected business and credit conditions, plans for expansion, capital outlays, job openings/hiring, and more. Generally speaking, we expect to see a bit of a rebound from last month’s lows.
University of Michigan Consumer Sentiment Index – Seen as a gauge on consumers’ willingness to spend, preliminary index data comes out this week, which may help assess how receptive the average consumer is likely to be to the economy reopening.
China Retail Sales – Retail sales on Friday will be especially telling, as they give us our first glimpse of consumer spending for the month of April. While China ramped up relatively quickly, the question is whether it has now stabilized at lower levels, which could throw cold water on any hope of a V-shaped recovery.
Jobless Claims – Out on Thursday, expectations are for this number to continue coming down, albeit slowly. Continuing claims, as opposed to new claims, may be a better measure to track from here.
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