“Chaos is merely order waiting to be deciphered” – Jose Saramago, “The Double”
May was merry for stock market investors as the S&P posted a +4.8% return with both small cap stocks and NASDAQ doing better still with returns of 6.5% and 6.9% respectively. Though March 23rd was ten weeks ago as measured by time it’s 36% distant as measured by the recovery in the market since that date leaving us 11.2% from reaching the all time high (as measured by the S&P) on February 19th. With the additional returns in the market on June 1st and 2nd the 39.3% return represents the largest market gain in 50 days in 75 years. Quite the journey!
The steps taken by the federal government to offset the effects of the shuttering of much of the national economy in March and April have had truly remarkable effects upon economic data resembling perhaps major league hitters participating in a home run derby in a little league baseball park. Consumer spending fell 14% in April. Personal income growth was 10% that same month resulting from households receiving federal checks. Dramatic growth in income and the inability of consumers to leave their homes to spend their windfalls resulted in a 35% personal saving rate. NEVER have numbers remotely similar to these been experienced in the past one hundred years of our national history.
Nobody pays much attention to money supply figures these days but perhaps we should. Historically M2, a measure of money which includes cash, checking accounts, savings and time deposits and money market funds, historically grows at rates between 0 and 10% per year most often hovering near 5%. In the three months up to May 11th the rate of increase was 82%! Essentially, what we’ve experienced this past several months is Quantitative Easing #4 but with this latest version dwarfing the prior three in terms of speed and quantity. What will be interesting is what happens when consumers are free to spend their dramatically expanded bank account balances. And maybe its already starting to happen.
In mid April 100,000 passengers were being processed through airports in this country. We’re now at 300,000. Still a long way from normal but a dramatic recovery nonetheless. Mortgage money is now on offer at a rate of 1.45%. One year ago the rate was 4.00%. Mortgage applications for new home purchases are close to their levels of January and February this year and are 50% higher than their level of five years ago. For the years 2018 & 2019 daily demand for gasoline was between 9 and 10 million barrels per day. In April it collapsed to 5 and we’re now at 7.5. In January the ISM Service Sector Business Activity Index, a measure of the economic health of the service sector, was at 60, a very strong level. In April it collapsed to 25. We’re now just above 40.
Perhaps investors should dial back to their pre-pandemic memories. In 2019 the market was up 22% though corporate earnings were flat lining in the face of tariff wars and the earlier fed rate increases which caused so much tumult in the stock market in the 4th quarter of 2018. From 2009 until late 2015 the fed had kept the Federal Funds Rate at .25%. In December of 2015 the fed increased that rate to .50%. In the following three years the fed would raise rates eight additional times with the rate peaking at 2.50%. By March 3rd of this year the fed had lowered that rate to 1.00% and we’re now back to .25%.
What the stock market is telling us should be relatively clear if we choose to grasp hold of some perspective. Massive increases of federal spending with most of it representing transfers of borrowed money to US households. Dramatic reductions in interest rates. Historically elevated levels of household savings. Wonder what the level of US economic activity is going to look like through the remainder of this year? Wonder how dramatic the recovery of corporate profitability will be in the 3rd and 4th quarters?
Shifting gears, lets look inside the stock market, the returns of the eleven different industry groups, and what they may be telling us about the course of the evolution of the economy. From the market low of March 23rd until May 13th the three best performing industry groups were Energy +49.43%, Health Care + 31.67% and Technology +30.18% in contrast to the S&P’s return of 26.04%. Interestingly, those three industries were three of the four sectors posting the lowest relative returns from May 14th through May 29th. The three best performers were Industrials +13.49%, Financials +13.28% and Real Estate + 10.92% with Materials close behind at +10.62% versus the S&P’s return of 7.03%. Connecting the dots we see a recovery in the industrial economy (Industrials & Materials), a booming Real Estate sector and a Banking sector with improving profitability as their margins widen with continuing near zero short term interest rates but with improving demand economy wide lifting intermediate to longer term interest rates.
The stock market? How about 3500 by year’s end? (The S&P 500 closed at 3185.25 Friday, June 5th)
Mark H. Tekamp
June 6, 2020