Where is the U.S. economy headed next?


Anthony Saglimbene, Ameriprise Global Market Strategist

Stock ticker numbers on a video screen

As of June 15, 2020

Looking back

  • While the 13.3% unemployment rate in May remains historically high, labor trends are improving.
  • Technology led markets higher in May, and stock indexes have recovered almost all their COVID-19 losses.
  • All 50 states have relaxed their stay-at-home orders.   

 

Up ahead

  • High frequency data is pointing to positive signs of economic recovery.
  • Cyclical areas of the stock market could outperform.
  • Reduced social distancing may lead to more economic activity and spending.

 

Markets surge higher

The S&P 500® Index returns in April and May were the best back-to-back months since the financial crisis of 2008-2009. Through the end of May, the index surged nearly 40% from its March 23 low, led higher by performance across Information Technology, Materials and Communication Services sectors.

Growth sectors of the economy continued to shine bright in May. However, investor attention has recently turned to small-caps and cyclical sectors, such as Financials, Industrials and Energy.

As the curtain begins to close on the second quarter, the NASDAQ Composite has claimed a new all-time high in June, while the S&P 500® Index is close to recapturing its Feb. 19 high. We believe the astonishing reversal in fortune for U.S. stocks is a result of the following key points:

  1. Growing optimism regarding all 50 states relaxing stay-at-home orders.
  2. A pickup in high-frequency data and mobility activity across the economy.
  3. A lack of a material increases in the number of COVID-19 cases as states reopen for business.
  4. Positive developments in COVID-19 vaccines and treatments.
  5. The massive and swift U.S. monetary and fiscal policy response to the coronavirus and economic shutdown (relative to other countries).
  6. Concentrated exposure to "new economy" market sectors such as Technology, Communication Services and Consumer Discretionary.

 

Activity is on the rise, which should be good for the economy

A collection of weekly, high-frequency data points in the U.S. has started to confirm the market's generally optimistic view of the future. Weekly updates centered on mortgage purchase applications, gasoline demand, railroad container traffic, initial jobless claims and consumer comfort readings have shown growing improvement since bottoming in late March and early April.

Near real-time mobility trends from Google and Apple also have started to play a more significant role in the short-term economic outlook, as well as expectations for a pickup in activity. On a national level, Google mobility trends (which use anonymized phone location data to measure movement) show a gradual uptick in activity across specific locations, such as retail stores and recreation areas.

As the Federal Reserve Bank of Dallas recently noted, a key driver to the economic stop in March and April was the "physical distance of people" and staying home to slow the spread of COVID-19. The Dallas Fed Mobility and Engagement Index (formerly the Social Distancing Index) has gradually rebounded higher over recent weeks. This means Americans are leaving home more often and spending more time away from home when they venture out. Simply put, the more time consumers spend away from home, the more apt they are to spend money and add to economic activity.

Keep an eye on 4 factors that could influence stock prices

Over the coming weeks and months, we believe the following factors could help shape the direction of stock prices:

  1. If America's reopening remains on track, we believe U.S. small-caps, cyclical sectors and international stocks could contribute more to overall market gains. Each of these asset categories is much further away from their all-time highs and still lower for the year. Watch to see if more asset types continue to participate in market gains.

  2. Investors should watch the direction of the 10-Year U.S. Treasury yield. Though there are a host of direct and indirect influences on bond yields today, a sustained pickup in sentiment and attitudes about future growth should correlate with a continued rise in the 10-year yield.

  3. Look to see if investor sentiment gauges continue to improve. Currently, retail and professional money managers remain cautious. A sustained rise in stock prices could generate optimism and result in sidelined cash and bond allocations shifting toward stocks.

  4. In our view, the market may need to see better trends in monthly labor and consumer data over time. High-frequency economic data and mobility trends provide only so much information. Gasoline demand, container traffic and mortgage applications can be volatile. Also, mobility trends lend great insight into where consumers are going, but tell you little about their spending trends.
        

Bottom line: We believe recent stock gains, more U.S. consumers beginning to venture outside their homes and a pickup in economic activity are encouraging signs that an economic recovery is under way.

 

      

Data source for indices and sector graphs: Morningstar Direct, as of June 5, 2020
Past performance is no guarantee of future performance