Cross Currents - July 27, 2020

Aided by massive stimulus from the Federal Reserve, the major indexes have mounted an impressive rally this year. Cautiously upbeat headlines regarding a vaccine have also supported sentiment. Yet, tensions between the U.S. and China are rising, and the coronavirus-inspired fog of uncertainty has yet to lift.

The strength of the economic rebound in May and June has been more than almost anyone could have anticipated. Record gains in employment (U.S. BLS) and retail sales (U.S. Census) suggest early investor optimism wasn’t misplaced, at least up to this point.

Yet, two months doesn’t make an economic recovery, as there is still much ground to be made up. The rise in Covid cases, the path of the disease, and the plateauing of high-frequency data suggest a slower recovery, at least near term.

The graphics below offer an unconventional view of the economy. The data may not completely line-up with sales activity at S&P 500 firms, but they offer a guide to the broader economy.

As businesses reopened, strong economic in data May and June coincided with the improvement in high-frequency data.

However, the spike in Covid cases has injected a new round of caution into economic sentiment. Data have plateaued over the last month, suggesting a slower pace in the economic recovery, at least over the shorter term.