The S&P 500 stock index hit an all-time high last week, powered by positive news on vaccine developments, slowing new coronavirus cases, and strong housing and manufacturing data.

We continue to see a sustainable economic recovery unfolding, supported by massive government stimulus and pent-up demand that should be unleased with improving consumer and business confidence that we are seeing.

Major Supports for U.S. Economic Recovery

Housing and Manufacturing are major components of the U.S. economy that are highly cyclical—when they are performing well, there is a high probability that the economy is headed in the right direction. The strength of last week’s housing and manufacturing readings suggests a strong rebound from the historically weak second-quarter economic readings is well underway.

Housing sentiment and new and existing home sales are all supporting the strong housing market narrative, which is being supported by record-low mortgage rates and pent-up demand. The NAHB Housing Market Index (a measure of homebuilder confidence) rose again in August, matching its record-high level from December 1998. All four regions posted gains, with notable improvement in the Northeast, where optimism hit a fresh record high, and in the West, where it was the greatest since October 2005. Improving builder confidence was led by another jump in prospective buyer traffic to a record high.

This surge in builder optimism, which implies a further strong pickup in housing starts in the next few months, is being confirmed by new and existing home sales. Housing starts surged a better-than-expected 22.6% in July, its third gain in a row, and the most since October 2016. Building permits, a harbinger for starts a few months down the road, jumped 18.8%, the most since January 1990. Existing home sales soared a record 24.7% in July, to the highest level since December 2006, and well above the consensus estimate. All four regions posted double-digit gains, as homebuyers across the nation took advantage of the record-low mortgage rates.

Meanwhile, we continue to see improvement in business surveys. Markit’s preliminary business surveys for August showed the recovery from the pandemic trough continued at a stellar pace, led by manufacturing. The manufacturing survey saw its fourth straight gain, to the highest level since January 2019. The increase was driven by stronger output and new orders growth while employment picked up for the first time since February.

The service sector survey saw its fourth gain in a row, taking it into expansion territory for the first time since January and to its highest level since March 2019. New orders rose and backlogs accumulated, leading to employment rising at the fastest pace since February 2019.

The significant improvements in the housing data and business surveys are even more impressive when you consider the recent virus infection spike and Washington’s stalemate on the next aid package. Until a vaccine is in place, we expect the virus to remain a headwind, especially for the travel and leisure industry. However, we do not expect this to derail the overall economic recovery. We also expect Washington to ultimately approve further aid that will provide additional support to those most impacted by the pandemic.

All of this suggests stocks and other risk assets will be supported by improving economic growth as we move through the back half of 2020 and into 2021. We continue to favor cyclical exposure (including Industrials, Materials, and Consumer Discretionary sectors) that benefits from improving economic growth.

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