The S&P 500 Index rose 2.5% last week and finished just 1% below its all-time high, set before the full onslaught of the pandemic lockdown.

Overall economic data remains encouraging, while cyclical stocks outperform.

Despite the headwind the pandemic has caused for several highly visible industries (restaurants, travel and leisure), there are other industries (housing, autos, healthcare and technology) that are experiencing healthy recoveries and encompass major portions of the overall economy. The overall economic data remains encouraging and so does the outperformance of cyclical stocks (all discussed below).

Unprecedented government stimulus remains a major economic support and we expect the next U.S. aid package to be agreed upon soon, in an amount well north of $1 trillion. This will further bridge the economy as we progress through the pandemic toward our view of a sustainable economic recovery.

U.S. Economic Readings Consistent with Recovery

Friday brought the much watched monthly jobs report which showed the labor market continues to heal (albeit slower than most would like). Payroll employment surprised to the upside in July, rising +1.76 million for a cumulative +9.3 million gain from its April low. The unemployment rate tumbled to 10.2% from 11.1%, below the consensus of 10.6%. While we have a long way to go to get to pre-pandemic labor market conditions, we remain encouraged by the current progress.

The monthly business surveys continue to support the recovery narrative. The ISM Non-Manufacturing Index (a service economy survey) increased to its highest level since February 2019, and contrary to the consensus of a decline (as several major states rolled back opening). It was the second straight month in expansion territory, following a deep contraction in April and May. This index suggests a rebound in activity from the recessionary low and a broadening of growth across industries. Indeed, 15 service industries reported growth last month, while only three contracted.

Encouraged by Global Cyclical Leadership

Stock market industry leadership can often give meaningful insight into the direction of the economy and the stock market itself. Ever since the March stock market lows (where defensive industries outperformed), we have seen significant outperformance from globally exposed cyclical industries. This group includes autos, energy, materials, semiconductors, consumer durables and media. We view this outperformance from highly cyclical, globally exposed industries as an encouraging signal for the future performance of the global economy and markets.

Global Business Survey Supports Recovery Narrative

The J.P. Morgan Global Composite PMI (a combined monthly manufacturing and service sector survey including over 40 countries) rose to a six-month high in July and is now in expansion territory for the first time since January. Business optimism recovered to its highest in the past 15 months, moving back to its pre-pandemic level. Improvement in the survey is being led by Europe and China.

Improving economic readings supported by massive government stimulus (both in the U.S. and globally), which is corroborated by cyclical industry outperformance, suggest stocks remain well supported.

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.

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