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 Fourth-Quarter 2020 Outlook:
- U.S. economy: After the third-quarter bounce, a wobblier and flatter trajectory for U.S. growth.
- Global economy: Considerable fiscal stimulus should keep economies afloat.
- Policy watch: No Federal Reserve interest-rate hikes until at least 2023.
- Fixed income: Lean into higher-risk assets to generate income.
- Equities: Focus on quality across the board (and dividend payers, too).
- Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.
Quote of the week:
“Smile, breathe and go slowly.” — Thich Nhat Hahn
A mixed bag of data from the IMF…
First, the good news. In its just-released World Economic Outlook (WEO), the International Monetary Fund (IMF) revised up its forecast for 2020 global economic growth. The IMF is now looking for global GDP to contract “just” 4.4% this year, compared to expectations of a 5.2% drop back in June, when the organization last issued its WEO. Much of this improvement was driven by the stronger-than-anticipated U.S. recovery to date. (In June, the IMF thought U.S. GDP would shrink by 8% in 2020, but that contraction has now been nearly cut in half, to 4.3%.) China is the only major economy projected to grow this year (+1.9%).
As for next year? The IMF still sees positive growth in 2021, albeit at a slower pace than projected in its previous outlook. Because the worldwide rebound has been stronger and faster than expected, the IMF’s revised growth forecasts for next year are only moderately lower, both for the U.S. (from +4.5% in June to +3.1% now) and the global economy (from +5.4% to +5.2%).
Now, the bad news. The IMF doubts the global economy will meaningfully make up the ground it’s lost this year—not even by the middle of this decade. After 2021’s forecasted initial bounce, growth rates worldwide are anticipated to return to pre-pandemic levels. Potential culprits behind the decline: inefficiencies created as the global economy retools on the fly to allow for greater social distancing and other COVID-19 mitigation strategies. Additionally, “scarring,” i.e., the lasting effects of lower labor force participation and increased business failures, will likely slow the global economy’s recovery in the medium term.
In a nutshell: The IMF is projecting that, within a year or two, global economic output will be back at its previous high. But that will still leave two to three years of lost growth compared to what was expected before the pandemic. The symptoms of this lost growth could include higher unemployment rates and weaker productivity growth. As a result, central banks can be expected to maintain easy monetary policy until at least 2025 against a backdrop of low inflation. Economies running below their potential output have a hard time generating even moderate inflation, let alone overheating.
…and a mixed bag of data from the U.S.
Last week brought a series of data releases demonstrating two things: (1) the U.S. economy isn’t going down without a fight heading into the fourth quarter, and (2) trouble spots remain.
Among the positive economic reports:
- Surging retail sales. Consumers opened their wallets in a big way last month, with retail sales (+1.9%) blowing past forecasts. August. Meanwhile, the “control group,” which excludes certain volatile components of the broader index and feeds into the GDP calculation, rose 1.4% in September after a downwardly revised 0.3% drop in August. Over the past year — a period that includes the economic shutdowns and steep recession — the control group is up 9.3%, the fastest pace since the data series began in 1993.2Despite the expiration of key income support provisions in the CARES Act, consumer demand has held up well thanks to high levels of personal savings accumulated since March. This suggests that many households have been able to amass a considerable cushion, which they are now drawing on for spending needs.
- Rising small business optimism. The NFIB small business optimism index unexpectedly jumped in September. Despite the ongoing distress felt by tens of thousands of American small businesses, especially in light of the expiration of emergency support measures like the Paycheck Protection Program, the index has now returned to pre-pandemic levels. More small businesses reported plans to hire workers and increase inventories heading into the holiday season, and a greater percentage believe now is a good time to expand. At the same time, the uncertainty component of the index rose to a multi-year high.In our view, this September surprise in the NFIB index highlights the potential mismatch between expectations for more fiscal stimulus in 2020 (high) and for the actual passage of a relief bill (low, for now). It appears that small business owners are counting on help from the federal government to sustain demand in the economy even as the ongoing pandemic forces many of them to operate well below full capacity.
In contrast to the upbeat retail sales and small-business optimism releases, last week also brought several disappointing data reports. These included:
- Jarring jobless data. The most worrying data point was the increase in initial jobless claims, to 898,000—a six-week high. Every single weekly observation starting with the massive spike in March would have been the worst on record prior to 2020, but the overall trend since then had been somewhat favorable, with claims declining gradually.3Meanwhile, continuing unemployment claims fell to just over 10 million, from 11.1 million the week before. Unfortunately, that doesn’t necessarily translate to 1.1 million people returning to work. Rather, eligibility for state unemployment insurance may be expiring for many, forcing them on to the “Pandemic Unemployment Assistance and Emergency Compensation” allowed by in the CARES Act. All told, according to the Department of Labor, over 25 million Americans are now receiving some form of unemployment assistance.4
- Subdued inflation. Headline consumer price inflation (CPI) data for September delivered few surprises, except that used car prices contributed disproportionately to the 0.2% month-over-month increase in the inflation rate. More Americans are shying away from using mass transit during the pandemic, perhaps contributing to increased demand (and thus higher prices) for used vehicles. Over the past 12 months, the headline CPI rate edged up to just 1.4%.5Core CPI, which strips out food and energy costs, also rose 0.2% in September, and 1.7% year over year. This latter number is likely to increase as the extreme deflation of the spring drops out of the 12-month calculation. What might the Fed think of this overall tepid inflation? Probably not much. Chair Jerome Powell and his colleagues are unlikely to begin tightening monetary policy until price increases are broader and more durable.
- Declining industrial production. While manufacturing is not nearly as important a part of the economy as consumer spending, September industrial production data nonetheless disappointed. Output shrank 0.6%, driven by declines in the production of motor vehicles and parts.6
Ultimately, the coronavirus-driven economic crisis remains one of constrained supply in selected industries, rather than constrained demand. But a prolonged period of high unemployment or a sharp increase in business failures could turn it into a more conventional recession fueled by declining demand, as opposed to the downturn earlier in the year triggered by state and local government shutdowns. And a more conventional recession, were it to occur, would likely require a far longer recovery.