The "Second Great Depression" that many commentators believe we're now headed for will almost certainly be the most painless economic downturn this nation has ever seen. At least, that's my takeaway based on an assessment of several key leading economic and stock market-based indicators. Here, I'll make the case that massive transfer payments and central bank stimulus will keep the U.S. economy on a relatively even keel in the coming months, while reducing consumers' pain. We'll also examine some of the top performers - including select consumer retail, info tech and entertainment stocks - as I make the case that investors should focus most of their attention on these market leaders.
As far as equities are concerned, the worst of the coronavirus crisis ended about six weeks ago. Since then, informed investors have been busy discounting the recovery phase that has already begun and will likely continue for the rest of the year. Indeed, the market so far likes what it sees as "smart" investors have already shed their pessimism and are positioning themselves for an economic rebound.
While the collective attention of most investors is on the plethora of bad economic news being released on a daily basis, smart investors are focused on what's likely ahead for the U.S. The latest employment numbers are unquestionably abysmal, but that's yesterday's news, and the stock market has already discounted it. The most likely explanation for the new bull market in the S&P 500 Index (SPX) is the realization among the smart money crowd that lockdowns will soon be over, and the U.S. economy will likely bounce back more strongly than most pundits anticipate.
More than a few analysts and economists have proclaimed that the Second Great Depression is upon us, but if this is a depression, it's almost certainly going to be unlike any depression the world has ever seen in terms of its lack of severity. The nation's fiscal and monetary policy tools are as complex and fine-tuned as ever, and they've achieved a level of effectiveness that central bankers of the 1930s could only dream of. Indeed, the huge shock absorbers now in place will keep the typical American worker from suffering the same economic fate as their counterparts in the First Great Depression.
To illustrate what I'm talking about, take a look at the following graph which shows the extent to which Americans have already been bailed out by the government. As Scott Grannis made clear in a recent blog, the U.S. minimum wage is now effective $25/hour. What's more, millions of Americans are now receiving unemployment insurance and stimulus checks that will keep consumer spending levels relatively healthy going forward, all things considered. Below is a graph showing the massive spike in continued claims (unemployment insurance) which illustrates this. With many unemployed workers receiving as much as $800 or even $1,000 per week in unemployment payments, the pain which many economists have predicted will almost certainly not materialize anytime soon.
Source: St. Louis Fed
Never mind that these massive federal expenditures come with a hefty price tag and will eventually have to be paid back in the form of higher taxes down the line. When it comes to politics, the name of the game is to assuage the public's economic pain as much as possible, kicking the debt "can" down the road as long as there's a road to kick it down. To believe that this has never been the case throughout recorded history would reveal incredible naivete and a lack of awareness.
With this in mind, let's examine some indicators which point to the consumer retail economy being in remarkably good shape right now. The first indicator I want us to look at is one of my favorite measures for how strong the U.S. middle class economy is. It's an average of six of the most important consumer retail companies which serve the middle class, aptly named the Middle Class Index.
As you can see in the above chart, the Middle Class Index is actually near its highest level of the last several years. Pessimists will no doubt be quick to point out that the index's chief components - Walmart (WMT), Kroger (KR), Dollar General (DG), and Wendy's (WEN) - have done well lately because they've been among the few national retail chains to have remained open for business during the lockdowns. (FYI, the other two index components are Ford Motor Co. (F) and J.C. Penney (JCP), which haven't done as well). However, if people were hurting for money, these stores wouldn't have done as much business as they have in the last few weeks (particularly consumer discretionary Wendy's restaurant). Thus, the clear message of this index is that America's middle class isn't feeling broke right now.
Not only have companies which cater primarily to the middle class done well in recent months, somewhat surprisingly, so have firms which have a more prosperous clientele. My Upper Middle Class Index is an average of the weekly closing stock prices for companies which sell things to consumers making roughly $100,000 or more per year. The components include: Target (TGT), Starbucks (SBUX), BMW (OTCPK:BMWYY), Apple (AAPL) and Ruth's Chris (RUTH). The ultra-discretionary stocks Apple, Starbucks, and Target have done fairly well in recent weeks, as reflected in the following graph. This is eye-opening in that it shows that higher income earners are still spending in the midst of nationwide lockdowns.
Not only have some of the nation's leading consumer retail stocks already discounted the economic impact of the coronavirus-related shutdowns, some key industries have done so as well, particularly info tech. It's no secret that info tech has been an essential component of the emerging work-from-home economy, with cloud and software stocks especially showing relative strength. As shown here, the Vanguard Information Technology ETF (VGT) has recovered most of its losses from the initial COVID panic during February-March and is likely headed back to its former high. This is a bullish chart, in my opinion, which suggests higher prices ahead for the info techs in the coming months.
Even more reflective of healthy buy-from-home consumer spending levels are the gaming stocks. Below is a chart showing the Wedbush ETFMG Video Game Tech ETF (GAMR), which has reversed almost all of its losses from the February-March crash. Video games aren't cheap, and if Americans were truly cash strapped, the gaming stocks wouldn't be outperforming right now - nor would Americans have the leisure to play games if they were hurting for money.
Looking elsewhere, the market's internal profile remains calm and offers no evidence of any selling pressure below the surface. There has been a slight-but-steady increase in new 52-week highs on both the NYSE and Nasdaq lately, while 52-week new lows have been well under 40. Keep in mind that anything below 40 new lows over a several-day period is a sign of a normal, healthy broad market condition. So, until we see a notable increase in the number of new 52-week lows, it's fair to assume the bulls retain control of the field.
Speaking of new highs and lows, below is the latest chart showing the 4-week rate of change (momentum) in the highs-lows. As many of you know, this is my preferred method of gauging the near-term path of least resistance for stock prices, and it's currently tilted upward. Unless this indicator breaks down substantially, it's another supporting piece of evidence in the bullish case for equities.
In closing, given the S&P 500's extraordinary 30% rally in the last few weeks, the market has probably already discounted the worst-case scenario for the pandemic and is looking forward to the U.S. economy completely re-opening. And unprecedented levels of fiscal and monetary stimulus will sharply reduce the economic pain associated with the transition period. Moreover, the relative strength reflected in several leading consumer retail stocks and key industry groups is a likely sign that "smart money" is being wagered on a gradual economic rebound in the coming months.
Finally, as long as the NYSE new 52-week lows remain under 40, investors should focus on the positive aspects of the market (including the relative strength leaders mentioned here) while ignoring the dire predictions of the doomsday prophets. For now, a bullish bias toward equities is still warranted based on the weight of evidence.