To Emerge or Not To Emerge...That is the Question
As I write this commentary, we appear to have a divergence between data that suggests we are recovering from the pandemic and public policies that could damage the progress already made. While public policies ought not to be ignored, there are some recent policy decisions that are divorced from logic and reasoning. The public should always be skeptical of what the "talking heads" are promoting (including me) if there is insufficient data to back up what they are pushing. As a student of history, I believe it's always important to look at where we have come from in order to know where we are headed. Here's what we're seeing so far this week...
Unique Recession, Unique Recovery. One year removed from the beginning of the recovery in the markets, the economy is still on the mend, but continuing to improve. Looking back on the data for the last 12 months, the contrast between last year's recession and the typical recession is remarkable. First, the typical recession lasts for 13 months on average. Last year's recession lasted only a few months (Q1 to Q2 of '20). Second, most recessions are brought on by an asset bubble and mature on a lack of consumer spending. Last year's recession was brought on by a virus and shutdowns. This forced consumers to all stop spending at once. Lastly, the typical recession ends when companies and consumers have weathered the storm and hiring resumes, thereby causing consumers to begin spending again. Last year's recession ended when states started to re-open as virus cases and deaths began to ease. There have been some fits-and-starts, but the economy is progressing as the faucet of consumer spending has been turned back on. Because of these differences, the economy is potentially in a better place today than at this same point in a typical recovery. The Savings Rate in 2020 soared to 15%, which is the highest level going back to 1960! Compared to previous recessions, this savings rate is much higher and was achieved in a short period of time. Most recessions take some time to develop, which causes consumers to continue spending at normal levels even 3 or 4 months into a recessionary environment. When we look back at the 2008 financial crisis, Consumer Confidence, Consumer Spending, and Personal Income did not start pulling back until 2-10 months into the recession. Last year, these metrics adjusted lower within 1-2 months into the recession, which means consumers adjusted quickly (or, were forced to due to shutdowns). Now consumers are beginning to spend (demand) at pre-pandemic levels.
Economic Releases and Earnings. The economic metrics had been mixed until this morning's Jobs Report was released. Through Wednesday's releases, 75% of companies have beat expectations. This is a little lower than the previous weeks, but companies are still on pace to set a record for beating expectations for Q1. The manufacturing data has not followed suit with last week's strong numbers. The ISM Manufacturing index disappointed compared to expectations and the previous month's reading. Vehicle Sales and Productivity were improved month-over-month. Weekly Jobless Claims continued to show improvement and beat expectations for the 4th consecutive week. Last week's number was revised higher, but just 4 weeks ago claims fell below 600k for the first time since the pandemic began and today's number fell below 500k for the first time. The ADP numbers disappointed expectations, but still came in much higher that last month's reading (+177k month-over-month). This shows progress in the labor market, which stands in stark contrast to this morning's Jobs Report. The market was expecting 978,000 new jobs, but the report showed only 266,000 new jobs for April. In addition, the Unemployment Rate increased for the 1st time since April, 2020. Some economists are questioning the accuracy of the Jobs data, given WJC & ADP numbers already released this week. Our view is that we are likely to see a revision higher for April's data in next month's Jobs Report. Meanwhile, it's evident that Inflation is showing it's ugly head nearly everywhere, from Commodity prices, to services. There are supply shortages and labor shortages. While jobless claims are declining, the number of those on extended pandemic benefits are still too high (see below in yellow, green, & blue). This is preventing people from participating in a job market that more openings than anytime in the last 2 years. Expect these disruptions to continue until benefits expire and/or wages adjust higher. Markets are trading higher this morning on the "bad news is good news" principle, with the anticipation that today's Jobs Report puts off tapering and rising interest rates.
The Latest on COVID. COVID has become more of a concern overseas, of late, as India has reported a surge in cases & deaths. While India ranks 2nd among all countries with 30 mil fully inoculated, only 2.2% of the population has been vaccinated. India ranks right behind China for the largest population in the world, so its not a shock cases have increased when their tallies were low (% of population) in 2020. Here in the U.S., we just hit the lowest positivity rate for COVID tests (3.6%) since the pandemic began. Continuing with our theme of using history as our guide, keeping this pandemic in perspective is important. In a typical flu season, only 45% of U.S. adults get the flu vaccine (on average). So far, more than 148 million people in the U.S. have received at least one shot of the vaccines (that's 45%). So, we appear to be on pace with the typical vaccination process. It's also important to remember that 33 mil people tested positive for COVID and the CDC estimates that another 81 million people were either asymptomatic or did not get tested when they, in fact, had the virus. Inoculations (both natural and from vaccination) puts the U.S. at 80%, i.e., herd immunity.