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 2020 Midyear Outlook:
- U.S. economy: Looking for a full recovery by late 2021, albeit with high unemployment.
- Global economy: More monetary and fiscal stimulus is needed to keep businesses afloat.
- Policy watch: No Fed interest rate hikes until well after the economy has healed.
- Fixed income: Lean into higher-risk assets to generate income.
- Equities: Focusing on quality across the board (and dividend payers, too).
- Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.
Quote of the week:
“You’d better watch where you go, and remember where you’ve been.” – Charlie Daniels
Economic data releases have been looking better…for the most part
Global data suggests a recovery from the economic damage wrought by COVID-19 is well under way. In fact, not only is the global economy improving, it’s strengthening faster than economists can revise their forecasts. One way of measuring that rebound: the Citi Global Economic Surprise Index, which has surged from -79.1 to +38.5 since early May.6 (This index gauges the extent to which economic data releases diverge from consensus forecasts; rising index levels indicate more upside surprises.)
Among the indicators bringing gifts to the economic “surprise party” were these releases for June:
- The JPMorgan Global Composite Purchasing Managers’ Index (PMI), which tracks manufacturing and service-sector activity worldwide, rose to a five-month high of 47.7— a move in the right direction albeit admittedly still below the 50 mark separating contraction from expansion.7 Although new business output fell and trade volume declined, the rates of contraction in these and other metrics continued to slow dramatically, fueling a rise in business sentiment.
- The eurozone’s composite PMI (48.5) hit a four-month peak.8 Again, the level was below the 50 threshold. Companies reported weak underlying demand as they struggled to gain traction despite the easing of lockdown restrictions. But optimism edged up, adding to hopes for positive third-quarter GDP growth for the region following a 3.6% contraction in the first quarter and what will likely be an even sharper downturn in the second.9 (Second-quarter eurozone GDP will be released on July 31.)
- China’s composite PMI jumped from 54.5 in May to 55.7, reaching its highest level since November 2010.10 Positive sentiment surged, with businesses forecasting increased client demand in the months ahead.
The U.S. has also contributed meaningfully to the improving global economic backdrop, thanks to unprecedented rebounds in consumer spending (for May) and job creation (May and June). We expect further strong monthly data for June following upswings in U.S. manufacturing and service-sector PMIs, released early this month.11
Of concern, though, is the continued escalation of U.S. COVID-19 cases. Last Thursday, more than 60,000 confirmed new infections were reported across the country—a record single-day total. Also last week, California, Florida and Texas recorded their highest daily death tolls yet.12
Not surprisingly, some high-frequency economic data—which provides a more “real-time” picture of the economy’s health than monthly or quarterly backward-looking metrics—has begun to stall, especially in certain areas heavily affected by the coronavirus. For example, public transit ridership, traffic congestion, small business hours and restaurant bookings have declined. In comparison, countries across Europe and Asia that appear to have been more successful in corralling the virus haven’t experienced similar setbacks.
On a more hopeful note, the U.S. economy is in far better shape today that it was in March and April, at the height of the coronavirus panic and countrywide lockdowns. Although people certainly remain on guard, they’re not as fearful. Against that backdrop, we think the U.S. economic recovery will continue, but most likely at a slower pace than we anticipated just a few weeks ago.
Are U.S. equities immune to the resurgent coronavirus?
Despite the past few weeks’ elevated COVID-19 numbers, U.S. stocks have proven quite resilient, if not downright intrepid. For the month to date, the S&P 500 Index has risen about 3%, extending its remarkable 20.5% second-quarter gain.13 And since bottoming in March, the index has surged 42.4%. What’s been keeping share prices buoyant?14
- First aid from the Fed. March’s steep equity market selloff was fueled by fear of the coronavirus outbreak and its economic impact. Ultra-tight liquidity conditions ensued, with investors dumping whatever assets they could find buyers for (including gold) and hoarding cash. To help quell the turmoil, the Fed administered heavy doses of aggressive and in some cases unprecedented monetary policy, providing much-needed liquidity to markets and financial support to key sectors of the economy.More than three months later, markets appear to have recovered nicely, with few signs of panic-induced trading. And in a nod to the maxim “Don’t fight the Fed,” investors have cited optimism about more central-bank stimulus as a reason to buy stocks.
- Washington’s willingness to open its wallet. Equity bulls have expressed confidence that the U.S. government will step up with a sequel to March’s CARES Act. A further injection of cash into taxpayers’ pockets would support aggregate income even if the economic recovery is slowed by the coronavirus.
- Improving vital signs. As noted above, U.S. economic data has mostly been very good—although the country’s still not fully open for business. But if the nascent recovery stalls, investors may still bid up share prices if they believe better days lie ahead.
Although COVID-19 headlines can seem overwhelmingly negative, there are occasional bright spots. Last Friday’s gain in the S&P 500 was driven, in part, by encouraging news from drug company Gilead Sciences on its anti-virus drug, remdesivir. We’ve seen this kind of market action before, with investors tending to regain confidence following good news (or even just rumors) about therapeutic breakthroughs in treating COVID-19.