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July Update: Mid-Year Observations and Future Outlook

Keel Point

July 9, 2020

by: Lyle Minton, Chief Investment Officer & Steven Skancke, Chief Economic Adviser

The easing of US economic lockdowns has generated a bigger than expected rebound in economic activity in May and June.  The recent resurgence in coronavirus infections is likely to slow the pace of recovery in the second half of the year. Financial markets are focused on a longer-term horizon.

Reopening the Economy is Showing Positive Results

The latest estimates are for GDP to decline 4.6% in 2020, an improvement from the June 10 Federal Reserve estimate of a 6.5% decline.

  • The big surprise July 6 was the rebound in the ISM non-manufacturing index after a similar upside surprise last week in the June manufacturing index.
  • Most ISM survey responses were in the last two weeks of June after the virus resurgence was underway, which is a positive indicator for a strong GDP upswing in the third quarter.

Likewise, on the jobs creation front, the 4.8 million new jobs upside surprise in June followed a 2.5 million increase in May vs. an expected 7.5 million jobs decline in May.

  • Weekly new jobless claims are declining but still in the 1.5 million range, and easily could spike back up with some states rolling back the reopening of local restaurants and bars.
  • Positive consumer and small business confidence readings remain fragile but hopeful that virus containment and therapeutics effectively will vanquish it sooner rather than later.

High-frequency data show the economic rebound continuing, albeit more slowly, quite likely leading to more disappointing results in July as a result of the resurgence in virus infections.  For example, people through TSA airport security checkpoints are up from 353,000 on May 30 to 605,000 on June 22 and 732,000 on July 5: so continuing to be positive but at a slowing rate of growth.

What About Financial Markets?

The S&P 500 dropped 34% from its February high to March 23 and thereafter rebounded 42%.  The Dow is lagging slightly and NASDAQ is positive year to date.  Financial markets see this recession as very different:  its cause is known, with a beginning and end, there is comfort in massive fiscal and monetary stimulus packages in the US and abroad, and there is growing belief that vaccines are coming soon.

  • Stock markets will continue to be volatile and driven by expectations and perceptions about the impact of the coronavirus on the economy and corporate earnings.
  • With equity markets close to where they started the year amid negative earnings expectations, the right response is to trust portfolio construction based on client risk profiles discerned in more dispassionate times. It is not a trader’s market with record ups and downs on adjacent trading days.

U.S. Fiscal and monetary stimulus programs so far are about $10 trillion in their combined potential effect – about 50% of the size of the US economy, with additional fiscal stimulus expected and Fed officials reiterating at every opportunity that it will do whatever it takes to mitigate the economic downturn and support the recovery.  In addition to concerns related to a coronavirus second wave, financial markets are also focused on a sustained recovery in employment, U.S. – China trade relations and the November elections.


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