The last week’s market highlights:
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s Q2 Update:
- U.S. economy: Looking for a relatively rapid recovery in the second half of 2020.
- Global economy: Europe may begin to outperform the U.S. in Q3.
- Policy watch: Fed to guide the economy even after the country reopens.
- Fixed income: Stay defensive, stay diversified.
- Equities: Focus on quality companies at reasonable valuations.
- Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.
Quote of the week:
“Life can only be understood backwards, but it must be lived forwards.”
COVID concerns come to the fore
With just two trading days remaining in the second quarter, the S&P 500 Index (+17.5% for the quarter to date) is poised to deliver its best three-month performance since 1998.4 Although a series of better-than-expected economic data releases helped fuel this advance, the bigger boost may have come from hopeful public health headlines—such as progress toward a COVID-19 vaccine or encouraging news about slowing infection rates.
In contrast, negative news on the pandemic slowed rallies during the quarter. On June 11, the S&P 500 fell almost 6%—its worst one-day showing in three months—amid a spike in coronavirus cases. And last week, U.S. shares stumbled midweek as the U.S. reported its biggest one-day increase in positive COVID-19 tests in nearly two months.5 Texas, California and Florida, the three most heavily populated states, each reported resurgences in the spread of the virus.
Some of this renewed escalation can be attributed to greater availability of testing, but that tells only part of the story. Many states have experienced a sharp rise in the percentage of people who have become infected, a potentially worrying trend. Other troubling indicators include increased hospitalization rates and evidence that younger populations may be more vulnerable to infection and severe symptoms than previously thought.
In the face of these developments, state and city leaders in hotspots across the country have scaled back plans to ease lockdown restrictions, reestablished strict social distancing rules and in some cases made mask-wearing mandatory in public places. Meanwhile, states that thus far have successfully “flattened the COVID curve,” such as New York, New Jersey and Connecticut, imposed quarantines on visitors from states that fail to meet specific coronavirus metrics.
Against that discouraging backdrop, some high-frequency economic data, which provide a more “real time” picture of the economy’s health than monthly or quarterly backward-looking metrics, have begun to stall in some heavily affected areas. For example restaurant traffic and reservations have fallen in Houston, Texas, and Charlotte, North Carolina, among other cities. And after peaking in mid-June, hours worked by employees in small businesses have declined in Texas, Arizona, South Carolina and Florida.6
Such pullbacks are to be expected. Over time, we’ve learned that setbacks involving the coronavirus are often followed by declining economic activity. A majority of the public seems to acknowledge the health threats posed by the pandemic and will likely retrench if it worsens. That alone would slow economic growth heading into the summer, regardless of how state and local governments respond.
Saving the best for last
After surging to a record high (+32.2%) in April, the U.S. personal savings rate fell in May, to a still-remarkable 23.2%.7 (Compare that to an average monthly savings rate of 6.3% since 2000.)8 What accounts for the buoyant level of savings?
- With most stores and shops closed in April and many remaining shuttered in May, people were deprived of “shopportunities.”
- Millions of employees working from home haven’t had to dry clean office attire or pay for commuting.
- Pandemic-fueled uncertainty has hurt consumer sentiment and with it, the desire to spend.
Meanwhile, personal income (-4.2%) nosedived in May after spiking by a historical amount in April (+10.8%).9 This drop was largely due to the relatively small number of $1,200 stimulus checks (part of the CARES Act) mailed out compared to April. Fiscal stimulus is keeping U.S. incomes afloat.
We think further stimulus is called for. Many people—especially those of limited means, who tend to devote more of their budget to necessities such as clothing, food and housing—have already spent their stimulus check. Meanwhile, the CARES Act’s $600/week jobless benefit, which supplements any state unemployment payments, is scheduled to end on July 31 unless Congress extends the deadline.
And first-time unemployment claims have now topped 1.4 million for 14 straight weeks.10 Until there’s solid evidence that the labor market is fully on the mend, continued programs to provide a backstop for low-income Americans will be crucial to sustaining the economy’s nascent recovery.