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.