Where The US Consumer Goes, So Goes The US Economy
At Revo Financial, we want you to be well informed about what’s happening in the markets. Here are a few of the key topics of conversation that deserve the most attention this month.
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The Federal Reserve Board (Fed) has continued to support the economy through a growing number of actions and promises. At the June meeting, the Fed left interest rates near zero with the expectation that full-year economic output decline will be between 4% and 10%. The Fed also expects unemployment will remain high, around 9% to 10%. Equity markets responded well to the Fed announcement, but soon after began to roil. On June 11th, the S&P 500 Index fell 5.89% on renewed COVID-19 resurgence fears and the Fed confirming the economy may take longer than expected to recover.
Equity markets have risen since June 11th. Investors continue to trust that the Fed intervention will overcome the economic pressures of COVID-19. Yet, many investors feel that the disconnect between the state of the economy and the equity markets’ performance is too large. We would agree, but it is important to remember this has been a rather short period. We do not expect the disconnect to continue forever. We expect the economy will either improve to justify the market levels, or the markets will fall to reflect the economic headwinds.
Some interesting data that drives this point home:
Consumer sentiment increased by the most since 2016 as jobs are coming back and states are reopening. The preliminary June figures rose 6.6 points to 78.9, beating the estimates of 75. While still below pre-COVID-19 levels, the upward movement is welcome. 67% of respondents still harbor concerns around a resurgence of COVID-19 and job market weakness. Where the US consumer goes, so goes the US economy.
Manufacturing data is still in deep trouble at 43.1 (anything below 50 is bad), though it was a slight improvement from April’s 41.5 reading. April’s final durable goods orders settled at -17.7% while factory orders plunged 13%. This is among the ugliest data out there.
The unemployment rate fell to 13.3% (from 14.7%), with a 2.5M increase in nonfarm payrolls. Expectations were for a 7.5M decrease in payrolls, which would have pushed the unemployment rate to around 19%. The unexpected turn prompted some to say that the economy may have turned the corner earlier than anticipated. Many workers have returned to their jobs following the economic reopening of states and countries. Others say unemployment is still too high and will likely only show marginal improvement from here in 2020.
Across the pond, the UK economy fell by the most on record in the first full month of lockdown, shrinking 20.4% in April. This was 10x worse than the worst pre-COVID fall and worse than the 18.4% expectation. We expect international equity markets to continue to have the same issues as the US.
What’s next: Economic data continues to trickle in every day. This information clarifies the direction of the economy and its rate of change. This data is necessary to determine appropriate positioning in long-run investment portfolios. Our largest concern is the resurgence of COVID-19 in many large economic states such as Texas and California. The longer COVID-19 remains the more pressure mounts on the economy. For now, investors believe the Fed will keep pumping stimulus into “the system,” but we are not convinced the Fed can support the economy forever.
Bottom line: We continue to be very cautious investors. While some portions of a portfolio continue to hold stocks, the “unknowns” at these market levels warrant patience and an overweight position to defensive asset classes such as bonds.
If you have any questions or would like to continue the conversation, please contact us.
