July 06, 2020 | Author: Kristina Hooper, (Chief Global Market Strategist)
Last week, the US issued its employment situation report for June. For the second month in a row it was an impressive report, handily beating expectations in terms of both non-farm payroll growth and the unemployment rate. However, I have two key concerns:
Economic data around the world improved in June
Other economic data in the US has been very encouraging as well. For example, the ISM Manufacturing Purchasing Managers’ Index (PMI) reading for June came in better than forecast at 52.6 — a nice improvement over the previous month’s reading of 43.1.1 In fact, it proved to be the best reading in this series since April 2019. What’s more, the new order sub-index saw a major bump — up from 31.8 in May to 56.4 in June — which bodes well for the future.1
And the US is not alone. Economic data in Europe and Asia are showing an improving economic situation:
Rising infections remain a critical concern in the US
The critical difference between the US and these other economies is that in the US, COVID-19 infection rates are on the rise. Several weeks ago, I wrote about the US dilemma — how economic data is improving while the infection situation is worsening — and I wondered how long the situation was sustainable. I am not sure it can last much longer if more fiscal stimulus is not forthcoming. In my view, more fiscal stimulus is clearly needed as so much of the stimulus already enacted is very temporary in nature. In addition, we are seeing a growing number of companies announce layoffs and file for bankruptcies while others are voluntarily re-closing stores.
Several weeks ago, US Treasury Secretary Steven Mnuchin shared his view at the Bloomberg Invest Global event that the US would be out of recession by the end of the year. I don’t disagree, but I believe gaining control of the virus and providing ongoing fiscal support will be important to enabling the US economy to grow solidly. The US could continue to follow in the economic footsteps of China and Europe — but it will need to follow in their epidemiological footsteps and achieve success in “bending the curve.” I worry that is becoming increasingly difficult because a significant cohort of Americans are resistant to wearing face masks. It’s worth noting that there was resistance to wearing masks in the US during the 1918 Spanish flu pandemic as well — so much so that an “Anti-Mask League” was formed in San Francisco — although most complied because they viewed it as a patriotic duty in order to protect American troops coming back from World War I.
Rising infection rates -- especially if accompanied by a failure to enact more fiscal stimulus — could finally have a more-than-fleeting impact on stocks — at least US stocks — especially as earnings reports roll in. Nearly 40% of companies in the S&P 500 Index have dispensed with earnings guidance this year — but they haven’t dispensed with earnings reports.4 And that could provide a significant reality check for equities. According to FactSet, the estimated earnings decline for the S&P 500 for the second quarter is -43.8%.
Conclusion
June’s positive jobs report and PMI data for the US are certainly nice to see, but I feel less positive about the US than I do about Europe and China. I would not be surprised to see US economic data lose momentum in the coming months if policymakers become complacent. I believe investors need to be prepared for that possibility and for the market volatility that could likely follow.
For now, I continue to believe that the massive monetary policy accommodation by the Federal Reserve and other central banks provides an upward bias to stocks. But I also maintain my long-held view that a three-tiered approach to this crisis — encompassing monetary policy, fiscal policy and public health policy — is necessary for solid economic growth. In other words, while central banks are doing what they can, I believe more fiscal stimulus and better control of the virus’s spread are needed to support the economy until a vaccine can be developed and efficiently deployed around the world. And while the stock market has decoupled from the economy in recent months, there is the potential that earnings season could reunite them, albeit temporarily, and make stocks more sensitive to rising infection rates as well as a possible lack of fiscal stimulus. And so we will, of course, be following earnings season closely.
1 Source: Institute for Supply Management, July 1, 2020
2 Source: IHS Markit
3 Source: Caixin
4 Source: FactSet Research Systems