U.S. manufacturing Purchasing Managers Index (PMI) data, progress on U.S. fiscal policy negotiations, modest easing in COVID hotspots, and a strong U.S. employment report drove positive equity gains this week. The MSCI ACWI Index, which represents global equities (i.e., both U.S. and international stocks), closed the week up 2.2%, while the MSCI ACWI Ex-USA (international stocks) gained .9%. The S&P 500 finished up 2.5%, while the U.S. small cap Russell 2000 finished out the week unchanged. Core U.S. bonds on the Bloomberg Barclays Aggregate U.S. Bond Index also saw a slight bump, closing the week up 0.1%.
On Monday, the Institute for Supply Management (ISM) released its July Manufacturing PMI figures (a measure of manufacturing activity and employment). It indicated economic expansion in the industry for the third consecutive month. A “50” reading means that the country’s economy is exhibiting neutral or stabilized growth; above 50 suggests expansion, and below 50 suggests contraction. As the charts below show, U.S. Manufacturing PMI reached 54.2 (left), comfortably in expansionary territory, and ahead of the preliminary estimate of 53.5. The forward-looking New Orders component of Manufacturing PMI (right) was particularly strong, finishing at 61.5 — well above initial projections of 55.1.
On Friday, the Bureau of Labor Statistics (BLS) released the July employment report, which showed that 1.8 million jobs were added to the U.S. economy, ahead of Wall Street’s expectation of 1.5 million. Following this month’s report, 9.3 million jobs have been added over the past three months (4.8 million in June, 2.7 million in May). The official unemployment rate fell from 11.1% to 10.2% on strong hiring in the leisure and hospitality, business services, and health care industries.
From an investor’s perspective, data points such as the pace of manufacturing growth, new manufacturing orders, and the employment report help give further clues about the economic backdrop. The PMI and employment reports are welcome surprises amid worries about the economic recovery potentially stalling in July amid worsening COVID trends. We think that these figures could be a positive signal to investors in the recovery’s progress.
However, some key risks do remain, including whether or not this demand is sustainable, as opposed to a possible response to backlogged orders between March and May. Also, while the employment report was encouraging, the positive trend could reverse if COVID trends worsen. We continue to think that the economic recovery will go on, but in a non-linear fashion (i.e., there will be bumps in the road that will cause market volatility). We will be keeping an eye on the pace of manufacturing growth and the employment situation in the coming months, which will be driven by developments in the below areas.
New data shows a continued decline in new cases and hospitalizations both nationwide and in hotspot areas, as the charts below indicate:
A continuation of this trend would be positive for financial markets; as we have noted before, there is a correlation between new cases and mobility and spending data. Consumer spending accounts for approximately 70% of the U.S. economy, and it may benefit in the coming weeks and months from these improving trends. However, the move downwards in cases and hospitalizations is still early, and a return to worsening trends would increase the probability of more restrictive (albeit more targeted) social-distancing orders, which would likely lead to a decline in consumer activity that could negatively impact markets.
On the vaccine front, the most promising candidates are expected to produce clinical trial data later this summer or early fall. In the meantime, the possibility of manufactured antibodies as a COVID-19 treatment has generated interest in recent weeks. Treatments being used currently include remdesivir and dexamethasone, which have both been proven to reduce the mortality rate of COVID-19. In addition to these treatments, adding a new option that could improve the odds of survival for COVID patients would be a welcome development. Lower overall death counts make it less likely that we will see a return to stay-at-home orders, which helps the U.S. economy (and financial markets) avoid the kind of volatility we have seen following surges in new case counts.
While we continue to feel that the overall trajectory of recovery is encouraging, a viable vaccine is not guaranteed, nor is it certain that a vaccine alone will end the pandemic. It also remains unclear when a vaccine could be widely distributed. In our view, investors should be cautiously optimistic about the state of recovery and continue to be prepared for any short-term cash needs and focus on their investment time horizon and financial planning goals. Short-term market volatility is likely, and there will be bumps in the road, but reacting to near-term movements is often a costly mistake.
Negotiations on a fifth fiscal stimulus have been slow in recent weeks as the negotiating parties remained far apart regarding their policy demands. However, on Tuesday, Senate Majority Leader Mitch McConnell told reporters that he would support the bill “[w]herever this thing settles between the president of the United States and his team and the Democrat[s].” Thus far, the White House and Democrats have agreed on another round of stimulus checks. While the two sides remain motivated to reach an agreement, the key sticking points that remain are the level of enhanced unemployment benefits, relief for state and local governments, and school funding.
This would be the fifth stimulus package passed, and we believe it would help mitigate the negative economic and market effects of the pandemic. From the perspective of financial markets, these funds are intended to help consumer, business, and state/local government balance sheets until the pandemic is under control. Support for state and local governments — which employ 9% of the entire U.S. workforce — is a key part of the fiscal stimulus: without it, we could see even more layoffs as state and local governments struggle to meet budgetary requirements.
We continue to think that the stimulus package will be finalized in the coming weeks. But there remains a risk of market volatility if negotiations stall, or if the final deal is smaller in scope than the market anticipates. Investors should be aware of — but not overly alarmed by — that possibility.