What a his­toric six months we have just wit­nessed in the mar­kets.  The fastest 30+% down draft in the his­to­ry of glob­al equi­ty mar­kets in the first quar­ter that was fol­lowed by the largest 50-day advance in mar­ket his­to­ry in the sec­ond quar­ter.  That sus­tained upward trend has con­tin­ued through the writ­ing of this blog in ear­ly Sep­tem­ber, even con­sid­er­ing the recent 5% drop in the NASDAQ (which, BTW, I con­sid­ered a bull­ish sign).

Even though the pan­dem­ic con­tin­ues to plague the globe, there are numer­ous rea­sons to be opti­mistic things will even­tu­al­ly get back to nor­mal.  Retail Sales for both the June and July months were above expec­ta­tions.  Sure, some of this has to do with the stim­u­lus pay­ments but, more impor­tant­ly, it shows the con­sumer is alive and well, putting their hard-earned mon­ey to use.  June month­ly Retail Sales came in 2.3% above June 2019 and July’s num­ber was 2.7% above July 2019, despite dou­ble-dig­it unem­ploy­ment rates and a par­tial­ly shut­tered US econ­o­my.  Grant­ed, there are down­side risks as the pan­dem­ic con­tin­ues to flare in var­i­ous parts of the coun­try and there is no vaccine.

The con­struc­tion indus­try is recov­er­ing quick­ly with the help of low inter­est rates.  After post­ing dou­ble-dig­it declines rel­a­tive to year-ago lev­els in both April and May, month­ly Hous­ing Starts in June came in a com­par­a­tive­ly mild 1.6% below year-ago lev­els and surged 8.2% in July.  One area of con­cern is Office Con­struc­tion.  We antic­i­pate this sub­unit of Con­struc­tion will lag well into 2021 due to more com­pa­nies embrac­ing work-from-home mod­els.  The Fed is help­ing by keep­ing inter­est rates at all time lows and have stat­ed this will be main­tained for the fore­see­able future.

In addi­tion, US Total Man­u­fac­tur­ing Pro­duc­tion ticked up for the third con­sec­u­tive month in July, increas­ing 3% from June.  While this met­ric con­tin­ues to trend below year ago lev­els, it is steadi­ly rebound­ing.  The one area that is ahead of year-ago lev­els is US Defense Cap­i­tal Goods New Orders, thanks to gov­ern­ment fund­ing and ris­ing glob­al uncertainty.

Based on the met­rics we fol­low, we antic­i­pate 2Q20 will be the low for GDP this year.  This means that busi­ness­es should be see­ing – or soon will be expe­ri­enc­ing – some recov­ery in their oper­a­tions.  Hav­ing said that, we do not antic­i­pate a “full” recov­ery until mid-2021.  There are numer­ous risks that could derail the recov­ery.  Most notably, of course, a sec­ond wave of COVID-19 that caus­es gov­er­nors and oth­er gov­ern­ments to shut down their economies again.  Anoth­er risk is the lack of an effec­tive vac­cine that is wide­ly avail­able by 1Q21.  This would sug­gest an annu­al, more severe, flu sea­son.  Oth­er risks include the esca­la­tion of the trade war between the US and Chi­na as well as the upcom­ing election.