Stocks reversed higher from last week’s selloff, with signs the economy is starting to rebound and stimulus measures from the Fed and Congress were unveiled. Most of the enthusiasm for risk assets came off the back of retail sales surging almost 18% in May, surpassing estimates of 8%. Additionally, figures for April were revised higher as well, showing consumers are venturing back out rapidly and opening their wallets. Other economic data, such as the NY Fed’s Manufacturing index also rose significantly more than forecast. Further support was provided from the Federal Reserve, who announced their intent to make additional purchases into investment grade bonds, pledging up to $750 billion. Meanwhile, progress is being made on several fronts in both vaccine trials as well as low-cost treatment options against the virus. Despite all the positivity, the actual numbers on the spread of the virus continue to climb, with worrying hotspots emerging in Beijing and several US states, including Florida, Texas, and California.
Despite some great recent headline numbers on employment, retail sales, and home purchases, other data is suggesting the reopening may be somewhat of an illusion. Many states, including New York and California, have continued with several measures still in place to keep the spread of the disease in check, at the cost of slower economic growth. Looking abroad, similar contrasts exist amongst other major economies, with the US and China still relatively closed, but with Europe closer to normal than many countries. Disjointed growth is also seen at the more granular level, with grocery sales and home improvement figures higher, while restaurants and hotels remain down over 40%. Alongside the reopening, we have seen a surge in new COVID cases in many locations that were most aggressive to reopen, leading many to question how successful the reopening process has been and what cost will be paid in lives. Equity markets continue to look priced as though a sharp V shaped recovery is imminent, while all signs point to a slower, more nuanced return to normal, with stops and starts given the difficulty containing the virus. Most economists and the Fed’s own projections assume the economy will not return to pre-COVID levels until 2022. While the stock market continues to climb a mountain of worry, we remain skeptical of whether fundamentals can catch up with market enthusiasm over the next several quarters.
At this time, we remain neutral on stocks, as we believe markets will likely be range-bound given the multitude of uncertainties facing the global economy. The threat from COVID, de-globalization disruptions, unemployment, and geopolitical risks remain major headwinds for risk assets, and leave us positioned cautiously for the coming months. The other major near-term risk is the end of unemployment benefits for millions of Americans, along with corporate aid through the PPP program. Longer-term, clarity around how these risks will unfold should provide us stronger conviction to add to risk assets. For now, staying invested with a cautious stance remains our preference. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.