The Wall Street Main Street Disconnect

The economic data is rolling in. With few exceptions, we don’t have much of a read on April’s numbers, but March has been ugly.

Weekly first-time claims for unemployment insurance have exceeded 30 million in a 6-week period – see Figure 1. It’s disheartening and a number that would have been inconceivable a couple of months ago.

March’s 5.4% decline in industrial production was the biggest one-month drop since the end of World War II (St. Louis Federal Reserve). A 7.5% decline in March consumer spending was the largest ever recorded (dating back to 1959).

Preliminary Q1 GDP fell at an annualized pace of 4.8% – see Figure 3. The number is subject to revisions. Q2 is expected to be much worse as the full impact of the crisis is reflected in the economic data.

The monthly rally for the Dow and S&P 500 is the best since 1987 and the best April since 1938, according to Dow Jones Market Data.

Investors are forward-looking and are eyeing 2021. In 2019, S&P 500 profits hit a record $163/share (Refinitiv). While the range of uncertainty is very high and projections are subject to change, profits are forecast to fall to $131/share in 2020 and rise to $168/share in 2021 (as of Apr 30). $168 may still be too high, and much will depend on how the economic outlook unfolds. Nevertheless, talk of some type of economic recovery later this year and next aids sentiment.

Finally, the virus appears to be peaking, and investors are cautiously eyeing states that are set to slowly reopen their economies. It’s a delicate task, balancing the need to contain the virus with economic vitality. Possible treatments and a COVID-19 vaccine have also soothed nerves.

We can continue to expect stock market volatility in the near term. The economic outlook is as uncertain as we’ve seen it, however businesses are slowly re-opening. Given what’s happening in the real economy today, stock market reaction has been cautiously encouraging.

Final thoughts

Activities and jobs around the country have been suspended but not ended. I am confident we will eventually see an economic recovery take root, and the pandemic will subside.

We are a resilient people. Together we will get through this dark night, and we will be stronger for it.

Created 2020-05-01 19:12:52