Manufacturing, consumers help drive Dow, other indexes to new highs.
Despite the raging global pandemic and the most contentious U.S. presidential election ever, stocks have surged by more than 65% over the past eight months from their March bear-market bottom. The Dow Jones Industrial Average broke the 30,000 level yesterday for the first time in history, and the index is on pace for its strongest month since January 1987, when it rose by 13.8%. But it’s been the laggard among the popular equity indices. The S&P 500 is up by a comparable 66%, while the technology-laden Nasdaq Composite has leapt by nearly 83% and the small-cap Russell 2000 has soared by almost 93% over the same time period.
On the flip side of the coin, however, benchmark 10-year Treasury yields troughed at about 55 basis points in March and subsequently spiked to 95 basis points earlier this month, before settling in at 87 basis points now. What stocks and bonds are telling us, in our view, is that the economy has come roaring back to life from the depths of the deepest recession in history, that Covid vaccine development is a hugely positive game-changer and that divided government will keep fiscal policy over the next two years smack in the middle of the fairway.
More growth or a double dip? Earlier today, the Commerce Department reaffirmed its outsized 33.1% annualized GDP growth in the third quarter, the strongest quarter on record, erasing much of the second-quarter’s 31.4% decline, which was the worst quarter in history. We are forecasting a more normal 4.5% gain in the fourth quarter, paced by what we believe will be a solid Christmas season, and the Atlanta Fed just raised its GDPNow forecast to 5.6%. Yet, there are some bearish prognosticators out there who are now forecasting negative quarterly GDP over the next few quarters and a possible double-dip recession on the horizon. We disagree.
Consumer is strong The consumer accounts for 70% of GDP, and the rebounds we’ve enjoyed in the labor market, housing, autos and consumer spending have been impressive:
- Employment While initial weekly jobless claims have backed up over the past two weeks, continuing claims have plunged by 76% from their recent peak in mid-May, and they’ve fallen by 62% since the $600 weekly unemployment bonus expired in late July. In addition, the official rate of unemployment (U-3) declined to 6.9% in October, down sharply from its peak in April at 14.7% (the single worst month for the labor market since recordkeeping began in 1939).
- Autos Total vehicle sales in the U.S. declined by 49% in April 2020 to 8.6 million annualized vehicles, down sharply from 16.8 million in February. But they have since surged by 90% from that April trough to 16.2 million annualized units in October.
- Housing The gauge of home builder confidence surprisingly leapt to an all-time, 35-year cycle high of 90 in November 2020 on lower mortgage rates and strong demand. New- and existing-home sales, and housing starts and permits have surged to new 14-year cycle highs in October.
- Consumer spending Back-to-School sales were revised up to a 4.1% year-over-year gain in 2020, and the National Retail Federation on Monday forecast that Christmas sales would rise by a much stronger-than-expected range of 3.6% to 5.2% (versus 4.2% in 2019).
Manufacturing follows suit Lest we think that consumers are doing all the heavy lifting, manufacturing is also enjoying a powerful V-bottom recovery from the economy’s April trough:
- ISM manufacturing index plunged deeply into recession territory (below 45) at 41.5 in April 2020 (a new 11-year low). But it surged back into growth territory over the next six months to a 2-year high of 59.3 in October.
- Industrial production plunged by its worst month-over-month (m/m) decline in more than a century of data collection, dropping 12.7% in April at the trough of the cycle. But it rebounded 6% m/m in June (its largest monthly gain since 1959), tacked on another 4.2% gain in July and leapt by a stronger-than-expected 1.1% in October.
- Capacity utilization fell to a new 53-year record low of 64.2% in April 2020, before rebounding to a much stronger-than-expected 72.8% in October. The pre-recession peak was at 79.6% in November 2018.
- Factory orders, after dreadful declines of 11% in March and 13.5% in April, rebounded strongly over the next five months, with m/m gains of 7.7% in May, 6.4% in June, 6.5% in July and 1.1% in September.
- Durable and capital goods orders and shipments all suffered sizable waterfall declines in March and April, but they have bounced back strongly the subsequent six months. This morning’s release of much stronger-than-expected preliminary October results was stunning. The highlight clearly was capital goods shipments nondefense ex-air (which feed directly into the quarterly GDP report), which soared by 2.3% in October, compared with consensus estimates for a moderate 0.4% m/m increase and September’s 0.7% gain.
- Wholesale inventories are beginning to rightsize themselves from the sharp inventory liquidation we experienced during the first half of this year. After declining in six of the previous seven months through July, inventories rose by 0.5% in August, 0.7% in September and 0.9% in October, as companies are shifting gears into strong inventory restocking to prepare for Christmas.
- Inventory liquidation flattened in the third quarter with a modest revised decline of only $4.3 billion, compared with a massive $287 billion decline in the second quarter. We believe that companies have already finished rightsizing their inventories, and a powerful restocking has begun, which will boost GDP growth.