August’s labor market statistics were encouraging and suggest that the US economic recovery is far from normal. According to the BLS, Nonfarm Payrolls expanded 1.37 million in August, slightly above expectations, and the unemployment rate dropped by more than expected to 8.4% versus consensus expectations of 9.8%. While the number of unemployed dropped by 2.8 million, there are still 13.6 million Americans out of a job, which is 7.8 million more than in February. The nature of the recession, which appears to be largely behind us, is like none ever experienced because it was government induced nearly worldwide. Governments across the globe intentionally suppressed economic activity rather than act in their normal supportive role. Recessions are often caused by structural imbalances such as excess leverage in the financial sector, over-accommodative monetary policy causing hyper-extended stock market valuations, overvalued currencies and commodity price shocks. These types of imbalances did not exist in the US for the most part prior to the pandemic and that may have set the conditions for a faster recovery. One dramatic example — over 10 million jobs have been recovered since April. By comparison, it took 54 months, from October 2010 to March 2015, for an equivalent number of jobs to be recreated in the aftermath of the Financial Crisis. [data from the US Bureau of Labor Statistics]
The US stock market continues to rebound from the pandemic panic-driven lows, with the NASDAQ and S&P 500 continuing to post new all-time highs over the past several weeks. This is prompting investors to question if the current rally can last, or even if it marks the beginning of a new bull market. There are risks that could derail the stock market’s advance ranging from tensions with China, resurging virus hot spots, social upheaval around the country, and the upcoming national elections. The US labor market is also a persistent drag and will not likely have recovered until well into 2021.
A few weeks ago we discussed US consumer trends, citing the elevated personal savings rate as reported by the BEA, in addition to citing expanding personal consumption. The relatively high personal savings rate suggests that there could be pent-up consumer demand to put that money to work. This week’s chart highlights total consumer credit outstanding, which has declined considerably since its pre-pandemic peak at the end of February. The decline in personal balance sheet leverage suggests that American households can access credit as needed or desired. This data is not very timely as June 30 is the most recent report, but it does suggest that the consumer is not as distressed as in previous recoveries.
The labor market continues to be the most restraining issue facing the economy — 14.8 million continuing jobless claims with initial claims amounting to 1.1 million this past week. But, the Bureau of Labor Statistics reported July payroll jobs expanded in 40 states, declined in one and were essentially flat in the remaining nine. We do need a broader and more inclusive jobs recovery because, as the BLS reports, the large increase in average hourly earnings is not good news — It reflects lower-paid workers being pushed out of the work force due to COVID-19 related business suspensions and closures. Strengthening trends in housing and manufacturing should spur further job growth and help restore this disenfranchised segment of the workforce. [Chart courtesy US Federal Reserve, Bloomberg LP (c) 2020]
Over the last several months we have cited several factors that, in our view, explain why the US stock market indices have been rising and may continue to do so. The most significant contributors are measures being undertaken by the US Federal Reserve and Federal government to support the labor market. The US consumer has been responding by increasing consumption, and so we see core components of the US economy like auto purchases and manufacturing rebounding. The official unemployment rate is still terribly high, measuring 10.2% in July, but that is a significant improvement over 11.1% in June.
Pandemic-related government-mandated lockdowns are being lifted (although in some areas of the country those being reinstituted) and economic trends should continue to improve as people return to work and to consumption. Critically, there are encouraging signs related to COVID-19. According to the National Center for Health Statistics (part of the CDC), weekly total provisional deaths as of August 8th registered 438, lower than the pre-surge figure registered on March 21st. These totals are significantly lower than figures cited by media outlets and Johns Hopkins University, a consequence of how deaths are verified and reported, but most importantly we are seeing improving trends regardless of methodology, and that is a relief. Very well known yet still necessary to point out, this week’s chart demonstrates the concentration of fatalities for those age 55 and older, showing the terrible risk to and impact on the elderly. But, by contrast, the low concentration and declining trend among the young may alleviate concerns about the upcoming school year and broadening re-openings across the country.
Over the past few weeks, corporate earnings across the globe have been showing signs of recovery. Citigroup’s Global Earnings Revision Index has been climbing for three weeks in a row, encouraging given the economic challenges facing the world. While this trend is positive, its path will be unpredictable due to COVID-19 related shut down and re-openings in several key economies. The recovery in corporate earnings, if it persists, could alleviate the tragic stress in labor markets and help reinvigorate economic activity heading into 2021. Fiscal support is building momentum with the European Union’s 750 billion Euro stimulus plan (discussed last week) and the anticipated fourth phase of US stimulus. It does remain to be seen if the enormous amount of spending, both fiscal and monetary, will have a lasting impact.
On Thursday, July 16th, the US Census Bureau released Retail Sales figures and month-over-month growth registered a nice surprise — 7.5%, well above the consensus estimate of 5.5%. The prior month’s figures were also revised upward. We see this as an obvious reflection of the reopening of the US economy and pent up demand. But, we don’t read much into the positive monthly gain versus the consensus estimate because economists have never had to forecast under conditions that can be considered “lock-down uncertainty”. What we do find encouraging and more interesting is that the reported annual growth rate was 1.1%. At this time last year the US economy was on firm footing, and yet Retail Sales are modestly above those levels today. While the trajectory of sales growth is a relief, we would not be surprised to see some sluggishness emerge as we collectively digest the flurry of initial purchasing pre-quarantine and new virus spikes elicit further lockdown measures. [chart courtesy US Census Bureau, Bloomberg LP (c) 2020]
Equities in the US have been rallying since late March. The total return of the S&P 500 is 41.7% from the crisis trough on March 23 through July 9. The recovery in stocks has been among the swiftest in history and has caught many market participants underinvested during this uncertain pandemic period. Even with tremendous stress in the labor market, the overall economy and current corporate earnings, the S&P 500 price level has produced a widely followed bullish technical pattern know as a “golden cross” after Thursday’s close. This formation occurs when two key trend lines, the 50-day and 200-day moving averages, intersect while trending upwards. Generally, this condition needs to be supported by other factors, such as the powerful fiscal and monetary stimulus which we have been highlighting for the past several months, as the main reason markets have been rebounding. Another positive development is influential investment research organizations have begun to increase corporate earnings expectations for 2021. There are still well-known risks including the ebb and flow of the global pandemic and China-related tensions with the rest of the world. We expect volatility in the capital markets emanating from these and other factors, but equities, particularly in the US, will grind higher. Chart courtesy Bloomberg LP and Standard & Poors (c) 2020.