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.
Stocks are reacting favorably to positive incoming economic data while looking past the rising COVID-19 infection rate, which is causing some states to roll back or delay their reopening. We expected the economic reopening to hit rough patches due to
the uncertain nature of the virus. However, we remain confident in the positive direction of the recovery, despite further headwinds for certain sectors of the economy (primarily leisure & hospitality).
Fiscal and monetary stimulus remain very supportive, with authorities fully committed to ensuring a sustainable recovery. Indeed, we expect a major follow-on stimulus package to pass Congress in the coming weeks which will provide further aid to individuals and businesses most impacted by the pandemic.
U.S. Economic Data Continues to Positively Surprise
On Thursday, the much-anticipated monthly jobs report showed rising employment and a lower unemployment rate for the second consecutive
month in June. Nonfarm payrolls grew by 4.8 million while the unemployment rate, which rose from 3.5% in February to 14.7% in April, fell to 11.1%. While the labor market recovery is just beginning, this report was better than expected and directionally
Despite the leisure & hospitality recovery experiencing headwinds due to rollbacks of reopening, other economic sectors are experiencing strong rebounds. The June manufacturing business surveys showed new orders surging while rail shipments continue to improve. The housing recovery has been very impressive with pending home sales soaring +44% m/m in May, while mortgage purchase applications have more than reversed their COVID-19 loss. We think the housing recovery is sustainable, supported by pent-up demand, demographics, limited housing supply, and record low mortgage rates.
The recoveries in housing and manufacturing are important to the overall job market with many jobs in other economic sectors tied to the success of housing and manufacturing.
Encouraged by Global Economic Readings
Europe and China have both provided significant government stimulus to their economies to offset the impact of the pandemic
fighting lock down measures. This stimulus has provided a major bridge to economic recovery now that their economies are reopening. Europe and China have also been successful so far in containing the virus, which is supporting their recoveries.
China was first to enter and exit lock down measures and is an important barometer for the economic recovery path. Their data continues to suggest a strong recovery, supported last week by stronger than expected manufacturing and service sector business surveys. The June Eurozone business surveys were also better than expected last week, supporting the strong recovery narrative.
Further supporting the healthy global recovery was last week’s release of the J.P. Morgan global manufacturing business survey (over 40 countries surveyed) which showed the downturn in the global manufacturing sector eased sharply again in June. The survey rose a record amount last month—adding to a previous record jump in May. While still signaling a contraction, the survey has reversed much of the severe March–April manufacturing contraction and is quickly approaching expansion territory.
We continue to expect a sustainable global economic recovery will unfold, despite regional headwinds from virus flare-ups. Global governments are fully committed to providing needed fiscal support while central banks are fully supporting credit markets. This should continue supporting stocks as we move into the back half of the year.
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