A key contrarian indicator sustains bullish readings, at least for the time being. The American Association of Individual Investor bull-bear spread survey continues to post negative readings, which is not surprising given the dire news on the US economic front. The labor market alone shows initial jobless claims approaching 40 million. Positive economic indicators are rare, yet US stocks continue to rebound, establishing higher highs and higher lows. Equity investors, for now, are looking past day-to-day bad news and towards the recovery as the country re-opens. There are still risks as new consumption patterns emerge and the potential for a second wave of COVID-19 looms later in the year, but the repatriation of American manufacturing and key service functions will likely lead to higher median wages, greater sustainability, and stronger national security. These long-term trends, in our view, will continue to attract the marginal global investment dollar to the US capital markets. [Chart courtesy Bloomberg LP (c) 2020]
A positive development has surfaced within the US fixed income market — Investment Grade Corporate Credit spreads have narrowed relative to the 10-year US Treasury yield, yet still remain wide by historical measures. There may be some opportunity in that sector of the bond market. Even with that backdrop, oil price volatility unnerved many observers as the near-term WTI contract (for May 2020 delivery) priced with a negative sign Monday closing at a bizarre -$37.63. It has since recovered to about $17. Ongoing anemic demand combined with a lack of available storage to create a moment where there was no immediate bid for oil. From an equity market standpoint, the impact was limited though as the major integrated energy companies continued to rebound along with the overall stock market. Importantly, the sector currently stands at only 2.9% of the S&P 500 while 10 years ago it represented nearly three times that share of the index.
We are optimistic about US capital markets, but the health crisis will continue to generate grim news and adversely impact the labor market and the overall economy. This week’s first-time unemployment claims brought the running total to 26.5 million American jobs, essentially wiping out all job gains since the Great Recession. The US is far from out of the woods, but the market is handicapping a positive outcome in the long term.
We continue to see encouraging signs in the US stock market as the three main indexes, the Dow, S&P 500 and the NASDAQ Composite have come off of their recent lows on March 23 and are making higher highs and higher lows – a key bullish technical pattern. Wednesday was interesting because the S&P 500 closed at a higher low even though it fell 2.2% for the day, and Thursday we had a modest follow through gain of 1/2 of a percent or so. The Nasdaq Composite was even more consequential because we continue to see higher highs after higher lows as well. And, in this week’s chart, the Nasdaq 100, laden with many of the US’ most innovative companies, is now positive in 2020 (still below its Feb peak) and at levels above its long-term trend lines.
Over the past week we have witnessed encouraging signs in US equities as the three main indexes, the Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite have come off of their recent lows on March 23 and are making higher highs and higher lows – a key bullish technical pattern. We are optimistic about US stocks but also understand that we are quite far from containing this health crisis and the recovery in our capital markets remains fragile.
The rout that began in earnest late February has arguably been exacerbated by State and Federal government-led virus containment efforts — business, school, recreational closures as well as encouraging social distancing — that have effectively suppressed the economy. Throughout history recessions, depressions and bear markets were caused by bubbles bursting like Asian currencies, Dotcom companies, US mortgages, and not by intentional government economic restraint. Government intervention normally supports economic activity.
Along with roughly $1.8 trillion in asset purchases and other stimulus from the Federal Reserve, The US Federal Government has approved and is now implementing the $2.3 trillion CARES Act directly supporting American families, small businesses and larger corporations. An important aspect of the package is the speed that funds will be sent directly to citizens, anticipated to be just a few weeks. This is critical considering that over 16 million Americans have filed for first-time unemployment assistance in the past three weeks alone.
Economists are forecasting in some cases severe contractions
in US GDP through the next quarter due to the impact of the COVID-19 virus. We
believe that the US economy started decelerating at the beginning of March and
it is extremely difficult to estimate the extent of the slowdown. America has
likely never before experienced as abrupt an economic disruption. In this week’s
chart (table) we have enumerated the National Bureau of Economic Research list
of recessions beginning with the Great Depression. The average contraction in
GDP since the Great Depression is 5.9% and lasted 13 months. Post WW II in the industrial
rebound-fueled era the average contraction was 2.3%, lasting 11 months. Economists’
current forecasts range from declines in GDP growth in the mid-single digits to
close to 10% from current quarter to Q2 2020. America has not realized that level
of contraction in economic activity for over 70 years.
The American economy is vastly more modern and resilient
than in the past and the US Federal Reserve and federal government have pledged
as much as $1.7 trillion in monetary and fiscal expenditures to buttress the
economy. That extraordinary amount is nearly 8% of nominal GDP. We could
experience a sharp rebound as this injection of liquidity stimulates spending, a
temporary wealth effect, and pent-up demand stemming from service-sector employees
returning to the labor force when this crisis subsides.