The easy part

The easy part—even if it’s heroic (unprecedented stimulus)—is pretty much over. The big bumps off record or near-record lows in nonfarm jobs, manufacturing, retail sales and consumer spending are likely to become a grind. Now we meet the devil in the details. It’s far easier to get the money to big companies than to small businesses, and to manufacturers than to myriad service firms. And it’s the lower income cohort that has lost the bulk of jobs, many of which may never come back. 26% of jobs, for whom the median income is $35,000, were lost to social distancing. It’s going to be a long slog for restaurants, hotels, cruise lines, ballparks, stadiums and amusement parks to attract customers. Spikes in new cases, particularly in Sunbelt and Western states, are threatening reopenings and reversing others. Whenever the economy moves from virtually no activity to some activity, the percentage increases are strong and occur quickly. The macro data, which tends to lag, has shown that and may reflect more of it the next month or two. But with more than 20 million people still out of work, online job postings failing to improve meaningfully, unemployment filing portals flatlining at high levels and Covid cases rising again, growth momentum almost certainly will slow without more stimulus. The easy part is over. 20 million people need a job.

Luckily, policymakers around the world keep piling on stimulus. It is natural to ask what is the limit and how will it be paid for. JP Morgan suggests there’s plenty of room to keep adding. With the pandemic obliterating capacity constraints and further lowering already benign inflation expectations, worries about how it will be paid for are for another day. While most are at or near zero-bound on policy rates, central banks have enormous room to use their balance sheets to hold down borrowing costs, ensure liquidity, support financial markets, signal future policy intentions and create a favorable funding environment for fiscal authorities. Trillion-dollar deficits as far as the eye can see. The most stable way to finance a deficit is to have foreign entities and institutions fund it, as they have for much of the past 20 years. But today’s situation is very much different, with the Fed being forced to buy the national debt. These huge purchases of Treasuries, and now investment-grade and high-yield debt, arguably are giving the Fed a lot of influence over asset prices—what’s the risk when it’s the buyer of last (and first) resort? The easy part—an explosion in the money supply. The broad M2 measure has surged 90% on a 3-month annualized basis.

Headlines about case growth and hospitalizations appear to have investors rotating back into the same safety trades that performed well during the Covid sell-off. This week alone, investors pulled $6 billion out of equities and put $18 billion into bonds. Evercore ISI expects the market to be violently flat over the next few months. Consensus sees a 10% decline in the offing, after rallying 40% to 50% across asset classes. With a record percentage of investors believing stocks are overvalued, summertime pullbacks arguably would represent buying opportunities. Attention has turned to the election. Polls and betting markets currently see a Democratic sweep, which almost certainly would result in higher taxes and increased regulations (more below). Wednesday’s steep sell-off, the latest in a series of up-and-down June swings that has left the market mostly where it started the month, marked exactly 65 trading days (three calendar months) off the March 23 low. The S&P 500’s 36.3% gain over that stretch ranks as the third best in history, fractionally trailing only the first few months off the 2009 low (38.8%) and the 1982 low (38.7%). The proclivity for the top 10 rallies off cycle lows has been for weak forward returns on a short-term basis, followed by remarkably strong returns three, six and 12 months out. That’s OK. The patient investor is sitting on a mountain of cash.

Positives

• Is the U.S. recession over already? Reports this week from the Chicago Fed (its gauge of national economic activity jumped by a record amount in May), initial Markit manufacturing and services reads on June, May new home sales, May durable goods orders, May consumer spending and activity in the Fed’s Richmond and Kansas City districts reflect an economy emerging from its short but deep recession.
• Is the European recession over already? Germany’s IFO business climate index rose to a 4-month high in June while France’s business confidence index and Sweden’s survey of household and business sentiment on economic conditions hit 3-month highs.
• Who doesn’t like to shop? Cowen’s bimonthly survey of individuals found consumer spending intentions improved further in mid-June, with e-commerce remaining elevated even as more brick-and-mortar retailers reopened their doors. About 78% expect to spend the same or more over the next four weeks, up from 66% who felt that way in mid-April.

Negatives

• Consumer behavior is more important for the economy than the virus count Second-wave worries seem to be undermining the consumer’s willingness to engage in certain activities, particularly eating out. Evercore ISI reports that OpenTable reservations have experienced significant declines in virus hotspots. Consumers will decide how fast the economy reopens.
• Not so easy Stimulus checks were the easy part—now 20 million people need jobs. New York City is considering 22,000 layoffs to save $1 billion. New Jersey struck a deal with the largest state workers union to furlough workers and delay raises. More than 2,000 Massachusetts educators have received layoff or nonrenewal notices. And Wyoming’s governor has told government workers to brace for layoffs and furloughs.
• This is a lagging indicator Unlike new home sales, which surged, existing home sales unexpectedly slid for a third straight month in May to their lowest level in almost 10 years. The National Association of Realtors notes sales reflected contract signing activity in March and April, when pandemic worries and lockdown policies were in full effect. It projects a rebound in the months ahead.

What else

Election watch The number of investors in Royal Bank of Canada’s monthly survey who think President Trump will win re-election fell to 37% in June vs. 76% back in December. 63% think Biden and the Democrats will sweep. The majority continue to believe Trump’s re-election would be bullish or very bullish for stocks, while 60% see a Biden victory as bearish or very bearish.

Election consequences If a “Blue Wave” sweep plays out, corporate tax rates most likely will meaningfully increase, more than offsetting potentially more market-friendly immigration and trade policies. Wolfe Research doesn’t think investors have even begun to factor in the potential for corporate profits to take a significant hit.

Think ‘Big Tech’ heading into Election Day? Data back to 1992 suggests investors favor higher quality names in the run-up to Election Day—or at least until the outcome becomes a foregone conclusion. Despite Trump’s recent stumbles, Nov. 3 is still a long ways away and he’s proved he’s a closer.

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