When I take a step back from what is happening in the economy and look at the major U.S. market averages, I see an incredible disconnect. And I’m not alone. U.S. Gross Domestic Product (GDP), which is the broadest measure of the value of goods and services in the economy, fell at the annualized rate of 32.9% in Q2 2020, the largest decline on record (U.S. BEA data – quarterly data began in 1947). The prior record, a 10.0% annualized decline, occurred in 1958 and coincided with the Asian flu pandemic. The contraction can be blamed on the unusually swift decline in economic activity that began in March and quickly accelerated in April.
Covid-19 lockdowns stifled economic activity in an attempt to reduce the momentum of its spread. As a result, we have experienced job loss at an unprecedented rate. In April alone, employment fell by a record 20.8 million (St. Louis Federal Reserve). For perspective, 152 million individuals were employed in February. While May and June saw a significant improvement from these very depressed levels, the improvement was unfortunately not sustained.
The economy generated a record number of jobs in May and June, erasing one-third of March and April’s job losses (U.S. BLS data). We also saw big gains in retail sales following a record decline in April (U.S. Census), as businesses began to reopen, furloughed employees returned to work, and stimulus money ($1,200 checks and generous jobless benefits) put directly into the hands of the public has worked itself into the economy. Nevertheless, the economy remains far below its pre-coronavirus state as people continue to be wary of being out in public.
As July came to a close, the broad-based S&P 500 Index turned positive for the year, while the tech-heavy NASDAQ Composite is having an impressive year (Table 1). Investors have taken notice that the larger tech stocks appear to be more insulated from the initial impact of economic pullback. The Federal Reserve’s massive response to the crisis, coupled with the response by the federal government, has encouraged buying. In addition, investors may be looking beyond a dismal Q2, both in terms of GDP and profits, and attempting to price in more favorable conditions later in the year and into 2021.
The recession that began in February (per the National Bureau of Economic Research) appears to have ended in April, which would make it the shortest on record. However, it may be months before the NBER, which is the official arbiter of recessions and expansions, decisively calls the bottom. As it is, we still see a good deal of uncertainty as states test different plans to reopen businesses and schools, which has resulted in a spike in Covid-19 cases. Some states have been forced to slow reopenings while others have had to implement new restrictions. Based on “high-frequency data,” such as daily air travel, restaurant bookings via OpenTable, and requests for directions via Apple Maps, economic progress slowed or stalled in July.
While those metrics do not directly correlate with the economy or the larger S&P 500 firms, they approximate broader economic activity. And, even if we had a moment of historic job growth, layoffs – as measured by weekly jobless claims – remain at historically high levels (Dept. of Labor).
As Covid-19 continues to hamper economic recovery and creates new uncertainties, the path of the economy is linked to the virus. We continue to hope that we will soon be able to formulate a picture of where we will all be when the global health crisis is mitigated. With large efforts to develop a vaccine underway for months and occasionally encouraging news, Fed Chairman Jerome Powell said in late July, “The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in keeping the virus in check.”
Social distancing, masks, and all CDC-recommended safety protocols are a step in the right direction. However, a vaccine and/or an effective treatment are probably the best way to enhance mobility and help us move past this difficult chapter in history. The economy may not be the same when the pandemic is eventually in the rearview mirror, and in the aftermath our path forward will be largely decided by how we adapt – as individuals, communities, counties, states, and nations.
Table 1: Key Index Returns