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US Equity Markets: Recession Signals Mount While Investors Increase Bets on Recovery

James Hyerczyk

The major U.S. equity markets edged higher for a second week in a row, posting their best winning streak since the all-time high was reached in mid-February. Economic reports for the month of March continued to paint a gloomy picture, but the reaction by investors suggests the news was already priced into the market.

Last week’s rally essentially comes down to the known and the unknown, and in this case the unknown is a positive. The knowns are negatives. One such known is that the sudden stop in economic activity caused by the implementation of containment measures caused a global recession. I don’t think investors are waiting for confirmation, they just know.

The unknowns are positive. There are signs that the pace of new infections is peaking and announcements that governments are working on plans to reopen the economies. Domestically, the U.S. administration released new federal guidelines to reopen the economy in different phases. Globally, Germany announced tentative steps to ease restrictions.

Last week, the benchmark S&P 500 Index settled at 2874.56, up 84.74 or +3.04%. The blue chip Dow Jones Industrial Average finished at 24242.49, up 523.12 or +2.21% and the technology-based NASDAQ Composite closed at 8650.14, up 496.56 or +6.09%.

U.S. Economic Data – The Bad News Continues

U.S. retail sales suffered a record drop in March and output at factories declined by the most since 1946, buttressing analysts’ views that the economy contracted in the first quarter at its sharpest pace in decades as extraordinary measures to control the spread of the novel coronavirus shut down the country.

Retail Sales plunged 8.7% last month, the biggest decline since the government started tracking the series in 1992, the Commerce Department said. Economists polled by Reuters had forecast retail sales tumbling 8.0% in March. Compared to March last year, retail sales dropped 6.2%.

The $46.2 billion decrease in sales in March was almost equal in a single month to the $49.1 billion peak-to-trough decline that unfolded over 16 months in the Great Recession.

Economists are forecasting consumer spending plunging at an annualized rate of at least 17.0% in the first quarter, which would be the weakest performance since record keeping started in 1947.

Economists also see no respite for consumer spending in the second quarter, with estimates as deep as a 41% rate of decline, despite a historic $2.3 trillion fiscal package, which made provisions for cash payments to some families and boosted unemployment benefit checks. About 22.0 million people have filed claims for unemployment benefits since March 21.

The Federal Reserve’s April “Beige Book” report of anecdotal information on business activity collected from contacts nationwide that “economic activity contracted sharply and abruptly across all regions in the United States as a result of the COVID-19 pandemic.”

Another report from the Fed last Wednesday showed manufacturing production plummeted 6.3% last month, the biggest decrease since February 1946.

A fourth report from the New York Fed showed factory activity in New York state slumped to a record low in April.

Coronavirus – Progress in Limiting the Spread

Although the numbers are staggering with over 2 million coronavirus cases worldwide and more than 688,000 in the U.S., there are signs that social-containment efforts are working, and government projections of COVID-19 cases and fatalities have come down considerably since March.

Additionally, new advances from Gilead Sciences in conjunction with a study at the University of Chicago on a potential treatment, Abbot Laboratories on rapid COVID-19 testing, and Johnson and Johnson on a possible vaccine, among other scientific innovations, bode well for an eventual reopening of and economy in a safe and effective manner, according to analysts at Edward Jones.

Finally, late last week, the White House introduced a plan to phase in a reopening of the U.S. economy, with states seeing lower rates of COVID-19 cases expected to lead the gradual resumption of more normal, though tempered, economic activity.

Final Assessment

The economic numbers are bad, but the action in the stock market suggests investors feel they are a temporary setback, given the national effort to combat-head-on the health crisis through aggressive social distancing.

Investors also feel that since the economy was in solid shape ahead of the pandemic, substantial monetary and fiscal stimulus can potentially help the recovery. The biggest concern at this time for investors is how fast the jobs market can recover.

This article was originally posted on FX Empire