Stocks posted another healthy week of gains and the September market drawdown has mostly been erased over the past three weeks.
This market improvement comes despite the stalled stimulus talks and a stubbornly resilient virus. Our still optimistic outlook on stocks and other risk assets is based on economic readings that continue to show improvement (Atlanta Federal Reserve is
now calling for third-quarter economic growth to come in at 35%) and that a stimulus package will ultimately get passed that will further support economic sectors hard hit by the pandemic.
There have also been significant advances in COVID-19 treatment protocols (as evidenced by President Trump’s recovery) that reduces the likelihood of additional severe lockdown measures that harm economic activity. Third-quarter earnings season starts this week and we expect the rebound in economic activity to be reflected in corporate profits that ultimately support stock prices.
Last Week’s U.S. Economic Releases Support Recovery Narrative
The ISM Non-Manufacturing Index (business survey of service economy)
increased at a better-than-expected rate, as service sector activity expanded for the fourth month in a row. Despite COVID-19 cases still rising, services growth accelerated last month after experiencing a brief lull in growth in August.
The OECD U.S. Composite Leading Indicator (CLI) increased for the fifth consecutive month. However, the gain was the smallest in that sequence, as the outlook for growth has moderated after the initial surge in post-lockdown activity.
Global Leading Indicators Point to Moderation in Growth
OECD Composite leading indicators (CLIs) for September continue to recover from the COVID-19 crisis lows, but at a moderating pace. In the major European countries of
France and Germany the CLIs are now pointing to a stabilization in growth. In the United States, Japan, United Kingdom, Canada and Italy they continue to point to a moderation in growth. Among major emerging economies, the CLIs for India and Russia
continue to signal moderating growth. Brazil is now seeing growth moderate (albeit at an above-trend level). In China, the CLI points to a stabilization in growth.
The global leading indicators are consistent with last week’s release of the J.P. Morgan Global Composite PMI (a global business survey covering over 40 countries) which showed economic growth slowing, but remaining solid. The survey showed economic activity rising in five out of six sub-sectors while new orders strengthened and the international trade index signaled expansion for the first time since August 2018. Importantly, the labor market showed stabilization which is needed for a sustainable recovery.
This week’s important economic releases include retail sales on Friday and a reading on small business optimism from the NFIB on Tuesday. Earnings season kicks off with several major banks reporting this week. The major banks work with all sectors of the economy so their results and commentary provide significant insight into overall economic activity.
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