Wednesday, June 10, 2020

Market Telegraphing A 'V-Shaped' Economic Recovery?

If one is only looking at the stock market, that is the S&P 500 Index, a 'V-shaped' recovery has unfolded off the March 23 low. Not too many expected this type of recovery as the virus/lockdown induced contraction was underway. However, on a price only basis, the S&P 500 Index is up 43.34% since the low on March 23.

Yes, the economic damage resulting from the virus induced stay-at-home mandates was significant. As I prepared to write this post I did not have difficulty finding non-stock related charts that signaled a V-shaped' recovery may actually be unfolding. I actually found I needed to limit what I posted in this article as much of the 'charted' data seems to be 'V-shaped' in nature.

Looking at the Citigroup U.S. Economic Surprise Index (CESI), now at a plus 69.6, it is up from a minus 133.1 in April. The chart of the CESI certainly looks like a "V" recovery. I do have some reservations with the CESI measurement as noted in a post from a few years ago that can be read here.

Today's release of the May NFIB Small Business Optimism Index rose 3.5 points to 94.4. The NFIB report noted eight of the ten components that comprise the index improved in May and two declined. As bad as this economic contraction has been, today's NFIB Index seems to have bottomed at a level far above the GFC NFIB low. The maroon line in the bottom half of the below chart shows a net 34% of firms expect an improved economy six months from now versus those that expect a worse economy. Again, far above the GFC low and near the December 2016 level.

Lastly, and although off a low level, air travel is another area experiencing a 'V-shaped' recovery. The below chart shows TSA Checkpoint Throughput is certainly on an improving trend. Will air travel actually reach a pre-virus shutdown level by August?

The market's decline and sharp recovery since March has been one for the record books. A part of the support for this V-shaped rebound is the quick snap-back in some of the data. Without a doubt the fiscal and monetary support has had a role in this recovery, yet the market will face a test when reports on upcoming economic activity as well as earnings are released covering second quarter activity. The market does not move higher in a straight line.

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