Why Wall Street isn't crazy
To Main Street, it has to seem unexplainable. We’re in the midst of the deepest recession since the Great Depression, shedding tens of millions of jobs in just weeks, and yet here’s Wall Street posting its strongest 50-day rally ever as measured by the S&P 500 off its March 23 bear-market low. The tech-laden Nasdaq 100 has even reached new highs.
As incongruous as it may look, what’s happening isn’t really out of sync with reality. Historically, stocks tend to start to recover during a recession when bad news peaks. And recent data, as bad as it has been, suggest the economic nadir is in the rearview mirror. Since mid-to-late April, jobless claims and nonfarm payrolls, manufacturing and services surveys, and consumer sentiment and confidence reports have all begun to trend up off their admittedly deep lows.
Most economists expect the current recession will encompass this year’s first and second quarters, when the Covid crisis at one point saw roughly 75% of the U.S. population and 90% of U.S. GDP fall under stay-at-home orders. That means they expect growth to resume in the quarter that’s less than a month away, putting the market past the point when it began to move up off global financial crisis lows in March 2009, three months before the recession ended during the Great Recession.
Recovery might surprise
In fact, we believe investors actually are reacting to the potential for a much stronger early expansion than occurred in 2009-10, with the consumer—abetted by stimulus checks and other relief that helped drive the household savings rate to an all-time record 33% in April and personal income up 10% for the month—staging a meaningful second-half comeback. We’re already getting a taste of this as more and more regions begin to lift stay-at-home orders and allow businesses to serve customers in person.
What we are witnessing around the country as this process occurs is the sometimes uncomfortable wisdom of crowds. Groups of individuals with higher risk tolerance are pushing the boundaries of reopening. We see this in crowded beaches in Maryland, packed bars in Wisconsin, even in protests across major cities. All of these groups are engaging in activities that are much more aggressive than the advice of health experts, but they provide critical data on how close to normal we can safely return. And so far, the data are encouraging.
At Federated Hermes, we’ve built our own Coronavirus Tracking Tool that shows weekly new infections in Indiana and Georgia, states that employed some of the most aggressive reopening plans, are running 30% below their peak levels despite a significant increase in testing. Anecdotally, state health officials from Missouri are reporting no new infections among party-goers that packed the Lake of the Ozarks over Memorial Day weekend. These results appear to be confirmed by data overseas where new infections are increasing by less than 2% on a weekly basis in Italy, Japan, Spain, South Korea and China, all places that also have lifted restrictions.
Better days ahead for Main Street
From an economic standpoint, a faster reopening of the economy likely means that fewer businesses will die and more people on unemployment will return to work. Granted, it’s still very early but the evidence to-date is promising. Historically low interest rates and unprecedented fiscal support are providing a nice tailwind, too, as are similar support measures overseas. All of this has Wall Street focusing on where the economy may be in three to six months, not where it is today. Hence, it’s seeing clearer skies over Main Street in the days to come.