It's Official

It’s official.  Stocks continued to rally yesterday as the largest economy in the world is getting back on its feet.  Investors rushed in to buy overbought stocks which were once cheapened by the onset of the pandemic… again.

 

N O T E W O R T H Y

 

In title only.  As my headline implies, it’s official, the US is officially in a recession.  The National Bureau of Economic Research (NBER) is a group of academics who are charged with determining the official state of the US economy.  The rule of thumb has always been that two consecutive quarters of negative GDP growth means that the country is in a recession.  Of course, that also means that we can only call it a recession long after it started.  Here is a term you have heard way too often in the past few years: “but this time it’s different”.  All sarcasm aside, it really is.  The unprecedented drop in production output and economic activity combined with an epic rise in unemployment has clearly caused the US economy to contract.  Though it may be obvious, the NBER yesterday announced that the US economy peaked in February and fell into a recession.  The group noted that they recognized that the causes of the recession were not the typical, historical drivers.  They further noted that although it may end very quickly, they felt compelled to make the judgement.  What does it mean to us, now that we are in a recession… officially?  Well, first off all, it brings to close a 128-month economic expansion which is the longest on record. Interestingly, this recession, one of the few which has been designated mid-quarter, may end up being the shortest on record. Most recession starts are marked in the quarter of the peak, which would have been 4Q19, as GDP officially declined in 1Q20, but not this time.   In terms of its duration, we won’t officially know that for some time as NBER typically calls the end of a recession long after it has ended.  The committee declared the end of the Great Recession in late 2010, even though it ended in the summer of 2009.  OK, so it is really just a label.  Getting into reality starting with the markets.  If you looked at the 2020 price graph of the Nasdaq or the S&P500 and removed all the labels, they would bear an uncanny resemblance to the letter “V”.  The Nasdaq composite made a new all-time high yesterday while the S&P500 closed yesterday’s session in the green for the year… officiallyUnofficially, the stock market has called the end of the recession on the very day that NBER declared that the US was officially in a recession.  Bond traders, though far less exuberant, also have great expectations for the economy. Thirty-year treasury bond yields briefly logged an all-time low in March, falling below 1%.  After a brief period of volatility yields settled in and began a systematic climb to just above 1.60%.  That doesn’t seem like much, but it says a lot.  When bond traders expect the economy to do well, they sell, causing yields to go up. Healthy economies usually bring inflation, which requires more yield to compensate for higher goods prices.  Many economists are expecting inflation to pick up rapidly in the wake of the COVID crisis, caused by the massive amount of federal stimulus.  Bond traders appear to agree.  Further back to reality, as of last week there were still 21.49 million Americans who continue to be unemployed and are seeking work.  It goes beyond the job losses.  According to research from Deutsche Bank, half of US households have experienced loss of income as a result of the pandemic.  That is a lot of people who are feeling the pinch regardless of any official designation of letter pattern.  For now, a label is just a label, and the recovery seems to be afoot.

 

THE MARKETS

 

Despite the obscure news that the US entered a recession earlier this year stocks rallied as more and more restrictions begin to ease.  The S&P500 rose by +1.2%, the Dow Jones Industrial Average climbed by +1.7%, the Russell 2000 traded up by +1.97%, and the Nasdaq Composite Index added +1.13% closing at an all-time high.  Bonds rose in yesterday’s trade and 10-year treasury yields slipped by 2 basis points to 0.87%.

 

NXT UP

 

- This morning, the NFIB Small Business Optimism Index (May) rose to 94.4 from last month’s 90.9, beating economists’ estimates.  Small businesses are gaining optimism, which is very encouraging.

JOLTS Job Openings (April) are expected to come in at 5.750 million, down from last month’s 6.191 million.

- The FOMC begins its 2-day policy meeting today.  Their policy will be announced tomorrow along with the banks economic forecasts and dot plot.

- This morning, Signet Jewelers beat expectations while Tiffany & Co missed.  We will hear from Macy’s before the bell and Chewy, Five Below, AMC Entertainment, and GameStop after the bell.

 

daily chartbook 2020-06-09