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Signs of a Sustainable Recovery Thumbnail

Signs of a Sustainable Recovery

Kevin Michels, CFP®, EA

With so many uncertainties still revolving around COVID-19, we’ve been surprised at the magnitude of the stock market recovery over the past 4 months.

The S&P 500 dropped 34% from its high on February 19 to its low on March 23. Since then, it’s gained 46% in just 4 months.

With the historical short-term volatility in the market, uptick in COVID-19 cases, the current recession, and the upcoming election, it’s tempting to have a gloomy view of the economy and stock market in the short term.

However, equity prices are one of the best leading indicators for the economy and despite all of the obstacles in the way, the recent rally suggests that the economy will eventually strengthen.

In addition to viewing stock prices as a leading indicator, there are several alternative data points that we are currently monitoring. 

Consumer Sentiment

The US Index of Consumer Sentiment tracks consumer sentiment in the US based on surveys of US households.

The chart below shows the level of the index since January of 2000. Make special note of the areas shaded in gray as they indicate what the index was doing during a recession.

Over the past 3 months, there has been a sharp rise in consumer sentiment. Currently the index sits at 73, only 12 points lower than the average level over the past 20 years. While there is still much we don’t know about COVID-19, the index indicates that consumer sentiment about the future is significantly more positive than it was during the “Great Recession” of ’08-’09.

Consumer sentiment drives consumer spending and since consumer spending accounts for about two-thirds of US GDP, positive trends surrounding this data point are important.

US Total Retail Sales and Food Services have seen a sharp uptick recently as well. Sales were close to $530 billion in January, by April they had dropped to $413 billion, and since then they have almost fully recovered to $524 billion in May. Overall, consumer sentiment is up, and the surveys are backed up by actual spending habits. We believe this is an important a strong sign towards a sustainable recovery.

Business Sentiment

The National Federation of Independent Business (NFIB) compiles a survey to track the confidence of small business owners and to gauge their outlook on the US economy. For the second month in a row, confidence rose as the country continues to reopen.

This is an important metric to watch considering small businesses account for nearly half of all private sector jobs in the country.

The survey tracks small business owner’s sentiment across 10 different aspects of their business including: 

  • Plans to increase employment
  • Plans to make capital outlays
  • Plans to increase inventories
  • Expect economy to improve
  • Expect real sales higher
  • Current inventory
  • Current job openings
  • Expected credit conditions
  • Now a good time to expand
  • Earnings trend

8 of the 10 data points improved from last month, while only two declined (expected credit conditions and earnings trend).

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Housing Market Trends

Home prices have been resilient, which in our opinion, is another encouraging sign of an economic recovery (although much of this is due to historically low interest rates and a lack of homes available for sale).

In addition to home buyers, home builders are feeling good about the recovery. The National Association of Home Builders/Wells Fargo Housing Market Index conducts a monthly survey of home builders about their perceptions of current and future home sales. It has been increasing since April and the most recent survey in June shows that confidence is just about back to pre-pandemic levels.

Jobless Claims

Another key component of the economic recovery and arguably the most important is how long it will take for people to get back to work.

US Initial Claims for Unemployment Insurance have slowed since March; however, the numbers are still astonishing. 1.3 million people filed for unemployment last week. Compare this to the roughly 200,000 claims we were averaging pre-pandemic and it really puts things into perspective.

Continuing Claims for Unemployment (people that remain on unemployment) have stayed at elevated levels even as the economy has reopened, suggesting businesses are proceeding cautiously in restoring their pre-pandemic workforce.

Bottom Line

Many of the important leading indicators such as equity prices, consumer spending, small business sentiment, and real estate prices point to a sustainable economic recovery. However, we’re in uncharted territory and there are a lot of people still out of work as we fight to get a handle on COVID-19, especially before flu season starts.

 The stock market “climbing a wall of worry” has never been truer than it is today. And while there will be significant bumps and hurdles to overcome in the future, we remain optimistic that our current recovery is sustainable.