EC Monthly Macro Monitor – June 2020

The stock market has recovered most of its losses from the March COVID-19 induced sell-off and the enthusiasm with which stocks are being bought – and sold but mostly bought – could lead one to believe that the crisis is over, that the economy has completely or nearly completely recovered. Unfortunately, other markets do not support that notion nor does the available economic data. Of course, markets look forward and there is the possibility that stock market buyers are privy to knowledge about the future that bond traders are not. Sure.

There is no doubt that economic activity is recovering from its worst levels. We can see that in numerous official and anecdotal reports. Because the official economic data is so delayed, investors have turned to new, non-traditional, and more timely measures of economic activity. This chart, for instance, shows total traveler throughput from the TSA on June 14th. Traffic has obviously improved since the nadir in March but it is still down 80% from last year.

You wouldn’t know that from looking at airline stocks. American Airlines stock has doubled from its lows and at its recovery high had nearly tripled. United, Delta, and Southwest have performed similarly. These stocks are still down roughly 50% YTD and they did receive government support but eventually, they will have to stand on their own. Air travel will have to recover a lot more than it has for that to come to pass.

We see a similar dynamic in the hotel industry where occupancy is currently about half the normal levels for this time of year.

Hilton stock, on the other hand, is down about 25% YTD and at the recovery, high was down just 15%. Like the airline stocks, either the recovery accelerates from here or the hotel stocks have gone way too far, way too fast.

The travel industry will probably take longer to recover from the virus shutdowns than almost any other industry so to get a view of the economy as a whole, we need to look at other data. Unfortunately, there are only a few data points available for May, with most of the data in the table below being from April. One exception is Retail Sales which rebounded impressively in May:

I think that is the chart all the stock traders are looking at, the month-to-month percent change. What investors ought to be looking at though is the actual level of sales:

Retail sales did indeed rebound in May but they are still down over 8% since January and 6.1% year over year. I would also warn anyone buying stocks on this news that this is one month after a 2-month shutdown after everyone received a stimulus payment and enhanced unemployment benefits. Is it sustainable? That is far from clear in my opinion.

I would also pay some attention to this chart of the inventory/sales ratio. This is from April so it probably improved somewhat in May but the point is that a sales rebound does not mean increased production until some of this inventory gets cleared out:

If you scroll through the table of economic data below the positives are hard to find but there are some bright spots. Most prominent is personal income which has actually risen thanks to the government payments I mentioned above. Caution is still warranted since the enhanced unemployment benefits are scheduled to expire at the end of July but expecting an extension in an election year doesn’t seem a big stretch. Further stimulus checks are certainly not out of the question either, especially if President Trump’s poll numbers keep dropping.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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Edward Simon 3 months ago Member's comment

No safe haven or are US Treasuries still it?