- The credit markets are still in decent shape.
- The economy is now in a technical recession.
- Overall, the markets are relatively tranquil.
For the last 5-6 weeks, I've been focusing more on the credit markets for two reasons: 1.) The then-incoming data didn't represent the true economic picture, and 2.) The primary policy-making goal for the first part of the pandemic was to keep the economy from collapsing due to the extreme nature of the lockdown.
Over the last few weeks, we've developed a clearer picture of the economic damage -- and it's severe. This isn't a surprise; when the wave of lockdowns picked up, economists universally noted that the decline would produce the worst economic data we'd see in our lifetimes. I'm now including it to provide the standard macroeconomic backdrop required for any investment analysis.
Let's still take a look at a few credit market statistics, which are still positive.After spiking, AAA bonds (in blue) and BBB bonds (in red) have moved lower. AAA bonds have returned to their low levels; BBB rates are still elevated, but reasonably so given the situation. CCC yields are still high, but below levels hit during the oil market meltdown in 2015-2016.
Next, let's turn to this week's two key releases from the BEA -- GDP and personal income. GDP was 4.8% lower:Personal income and consumption were also lower; the former dropped 2% while the latter was 7.3% lower (in chained dollars).
Let's intermix the graphs from these reports, starting with consumption data, which is reported monthly:Durable goods purchases (in blue) cratered; they were off nearly 15%. This is understandable since consumers don't make large purchases during periods of economic uncertainty. However, the big reason for the historic drop in consumption was the large drop in service spending (in green), which is about 70% of consumer spending. This is the real damage from social distancing measures along with a general lockdown.
All categories of business investment were lower; equipment (in blue), IP (in red), and non-residential structure (in purple) spending were lower. However, residential real estate (in green) was surprisingly strong.
- The credit markets are now stable. This is utterly crucial for the lockdown as it means companies have the ability to finance operations.
- The general economy is now in a technical recession -- there was a contraction in the first quarter and second quarter numbers will likely be the worst on record. However, as James Bullard has noted, this is a self-imposed recession, undertaken for public health reasons. The hope is that after a shutdown, the economy will be able to restart, allowing for a solid 2H20.
Given the terrible nature of the economic data, why is the stock market rallying? Simple: traders are betting that the size of the federal programs put in place will be sufficient to allow the economy to quickly restart. Only time will tell if this is the correct conclusion.
Once again, the performance table is a bit odd. On the plus side, small-cap indexes were up for the week. Their underperformance had been an issue during this relief rally. But this week's gains show there's a modest risk appetite out there. However, larger-cap indexes were off modestly. Finally, the long end of the Treasury market was off.The sector performance table is pretty positive. Energy -- which had been underperforming due to the oil market sell-off, was the top performer. Basic materials probably caught a sympathy bid. Notice that defensive sectors dropped, showing a modest net outflow.
Overall, the market is remarkably tranquil. The SPY traded in a very narrow range this week -- about 13 months. And, it ended slightly below the week's open.The two-week chart shows the same situation. Prices dropped last week, rallied for most of the last 14 days, but sold-off today to close near the opening from a week ago Monday. Once again, notice the narrow trading range, which indicates volatility is definitely lower. Over the last 30-days, prices are in a clear, upward-sloping trendline. Prices did break trend on today, but that was after hitting the 200-day EMA. They have now fallen back to the 50-day EMA.
This is actually a pretty good place to end the week. Prices made their first run at the 200-day EMA only to fall back. That's not unheard of. But today's sell-off was very mild relatively speaking. And the drop of volatility indicates that traders have settled into a modest rhythm.
That's it for this week. Have a good weekend.
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