In lieu of our usual Weekly Bulletin, we are publishing special reports to discuss the market reaction to evolving news on the coronavirus outbreak. We would stress the following observations as developments continue to unfold.

Despite recent stock market volatility and concern about rising new COVID-19 cases, we remain encouraged about the economic reopening and the prospects for stocks and other risky assets in the coming months. It is typical for stocks to consolidate major gains and it is not surprising to see a correction after the 40% plus surge in stocks after the March lows. The massive fiscal and monetary stimulus that has been applied to combat the economic fallout of the virus containment efforts is leading to significant improvements in U.S. and global economic indicators.

Encouraged as U.S. Economy Reopens
Housing and autos are major cyclical components of the economy and both are showing major signs of life. May vehicle sales are up 42% month-over-month to a 12.2 million annualized rate versus 8.7 million in April. Preliminary data suggests June’s auto sales are even stronger than May’s. In addition, mortgage applications for home purchases are up 71% from their April lows. Retail sales are also well off the lows as evidenced by major retailer comments last week. This increase in major consumer purchases should lead to improving manufacturing conditions in the coming months.

The rebound in big ticket purchases suggests consumers are maintaining confidence in the future despite the economic fallout of the pandemic. Not surprisingly, measures of consumer confidence continue to trend higher, after bottoming at levels much higher than after the 2008 financial crisis. Importantly, consumers were in much better shape entering the current crisis relative to 2008 when consumer debt levels reached unsustainable levels. Consumers are also being supported today by the massive fiscal stimulus put in place to combat the economic fallout of the pandemic.

Our banking system is also much healthier today relative to 2008. Critically, banks are better positioned today to extend consumer credit for houses and autos. A healthy consumer and banking system are major attributes for a sustainable economic recovery. Policy makers have also responded rapidly to the current crisis, unlike the much slower response in 2008—another important attribute for a sustainable recovery.

Encouraged as China’s Economy Reopens
China was the first economy to exit lockdown and we continue to keep a close eye as it reopens. China’s manufacturing indicators typically lead the rest of the world by several months and it’s encouraging their manufacturing indicators are improving and now signaling an expansion. Chinese auto sales have recovered to pre-crisis levels while policy makers have signaled they will provide additional support as needed to ensure a sustainable recovery. Other leading indicators of China’s economy, including credit and money growth, are also sending positive signals.

China is the second largest economy and a major export market for many other countries. The health of its economy is important for the entire global economy.

European Developments are Positive
Europe has now responded to the crisis with as much stimulus as the U.S. and its economy is suggesting a recovery is underway. Credit conditions are favorable as indicated by lower corporate and sovereign bond yields. With Germany and France agreeing to the likely issuance of Eurobonds, EU breakup concerns have eased. Concern over the potential breakup of the EU was a cause of significant economic uncertainty after the 2008 financial crisis - a sustainable economic recovery is more likely with this concern removed. Europe has also successfully flatted their COVID-19 infection curve, which should aid the recovery.

While acknowledging the future path of the virus remains a risk, we are encouraged that a global economic expansion will support stocks and other risk assets as economies reopen and we move into the second half of the year. We continue to favor the secular, defensive growth characteristics of the Technology and Health Care sectors.

Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment.

This report is provided for informational and educational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities or a recommendation for any strategy or to buy, sell, or hold any product. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis.

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