VIX/VXV Level Warrants Investor Attention

July's return for the S&P 500 Index of 5.64% pushed the index into positive territory for the year, returning 2.38% year to date. More impressive is the S&P 500's return since the March 23 low at +46.2%. It is hard not to agree there appears to be an upward bid to the equity market in spite of concerns around the virus induced weakness in some of the economic data, especially in the jobs/employment data. In my last post I wrote about the AAII Sentiment Survey and concluded the market seems to be climbing a wall of worry given the low level of bullishness being expressed by individual investors.

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Market Climbing A Wall Of Worry: Weakening Bullish Investor Sentiment

AAII reported bullish investor sentiment fell 5.83 percentage points to 20.23% in the Sentiment Survey release today (7/30/2020.) This is the lowest bullishness reading since bullish sentiment was reported at 17.75% on May 26, 2016. The Sentiment Survey is derived from AAII's requests of its members to report their expectation about the stock market's direction in the upcoming six months.

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An Economic Tailwind Would Be Favorable For Stocks

With the consumer accounting for nearly 70% of economic activity, this past week's jobs report came in on the disappointing side of the ledger. With state governors continuing to pause some reopening of their respective states, it is not a surprise that the jobs report disappointed. Claims on a non-seasonally adjusted basis fell, but declined less than consensus expectations. The bigger issue in my view is the number of continuing claims of all individuals for all the unemployment programs. The total number of individuals receiving benefits equals nearly 32 million. That is an unemployment rate over 21%. The headline continuing claims number is reported at 16.4 million, but does not include the recently established large Pandemic Unemployment Assistance category which totals 13.2 million individuals. These are persons who do not qualify for typical unemployment benefits.

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Strong Rebound In The June NFIB Small Business Optimism Index

I still believe the recent economic data is experiencing a "V-shaped" recovery and the equity market seems to concur. So many times though, we do note the market and the economy do not always react to the same information. With the S&P 500 Index's 1.34% gain today, it is now up .40% on the week. Over the last eight trading days the market is up 6.14% since June 29. If the market finishes positive this week, it will be the third consecutive week of positive gain for the S&P 500 Index.

Today the National Federation of Independent Business (NFIB) reported that the Small Business Optimism Index increased 6.2 points to 100.6. Also included on the below chart is the fact more firms are expecting an improved economy six months from now versus a worse one. 

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Mutual Fund And ETF Flows Don't Favor Stocks

As is said from time to time, a picture is worth a thousand words and one simply needs to look at mutual fund and ETF flows to see the truth behind the statement. Investors' actions indicate stocks have not been at the top of their buying list for a year and a half. As the top two panels in the below chart show, cumulative mutual fund and ETF flows for stocks have been decidedly negative for a year and a half.

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Summer 2020 Investor Letter: A "V-Shaped" Market Recovery

The speed of the market decline in the first quarter was unprecedented and the ensuing recovery in the second quarter was as impressive as the gut-wrenching decline in Q1 2020.

Our Summer 2020 Investor Letter contains commentary on the economic and market impact precipitated by the virus mandated shutdowns. With the third quarter underway it seems the worst of the economic damage caused by the virus-induced stay at home mandates just might be behind us. States are reopening their economies resulting in a significant pickup in economic activity, albeit from a low level. The fiscal and monetary response to the virus-led economic shutdown is substantial and provides interim support for businesses and consumers, allowing time for businesses to reopen and bring back furloughed employees.

Our Summer 2020 Investor Letter contains additional commentary on the current environment and our expectations for the balance of the year. More insight is accessible at the Investor Letter link below.

• Summer 2020 Investor Letter

The "V-shaped" Recovery Continues: Now It Is The ISM PMI and Non-Manufacturing Index

I have noted in a few recent posts that much of the economic data being reported is recovering in a "V-shaped" manner. In other words the economic rebound taking place as states are reopened and businesses get up to speed is occurring at a strong clip. Today's ISM Non-Manufacturing Index report came in at 57.1%, an increase of 11.7 percentage points over May's 45.4% reading. ISM noted this was the largest single month increase in the index's history going back to 1997. Last week's ISM report on the Purchasing Manager's Index (PMI) jumped into expansion territory with the PMI coming in at 52.6%, up 9.5 percentage points from May's reading.

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A Healing Job Market And Economy But Poor Investor Sentiment

It is hard not to look at much of the recent economic data and not come to the conclusion a V-shaped recovery seems to be unfolding. Certainly many of the reports are coming off depressed levels; however, a sharp recovery is occurring nonetheless. Today's nonfarm payroll number is another example with a month over month increase of 4.8 million versus a consensus expectation of 3.0 million increase.The labor market still needs healing, but payrolls are up 8 million in two months.

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Leading Economic Index Joins The "V-Shaped" Data Recovery

Last week the Conference Board released their report on the Leading Economic Index (LEI) along with data on the Coincident Economic Index (COI). The LEI rose 2.8% in May after falling 7.5% in March and down 6.1% in April. The report notes the improvement in unemployment insurance claims accounts for about two-thirds of the LEI improvement. With consumers representing a large part of the economy, an improvement in the job market is important. Three of the ten components that go into the LEI calculation are suggesting weaker economic conditions, one being the new orders component. The Coincident Indicator rose 1.1% after falling 2.2% in March and down 10.4% in April. In evaluating the ratio of the LEI to the COI, one can clearly see the "V-shaped" rebound occurring with this data metric. A trend reversal with this ratio tends to occur as the economy looks to be recovering.

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Individual Investors Expressing Equity Market Skepticism

Individual investors continue to express a low level of enthusiasm for stocks if the AAII sentiment survey is any indication. Today's AAII Sentiment Survey report noted individual investor bullish sentiment declined 9.9 percentage points to 24.4% with most of the decline showing up in the bearishness reading which increased 9.7 points to 47.8%. The bull/bear spread now stands at a wide -23.4 percentage points.

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