Daily Global Perspectives

The U.S. ISM manufacturing index rose 1.6 points to 54.2 in July. This stronger than expected print followed the 9.5 point jump to 52.6 in June, which was the largest gain since August 1980. The index has continued to improve since the dive to 41.5 in April, the lowest reading since April 2009. Gains were broad-based with the new orders component, a strong leading economic indicator, climbing another 5.1 ticks to 61.5 after the 24.6 point surge to 56.4 in June.

Second quarter 2020 U.S. real gross domestic product (GDP) decreased at an annual rate of 32.9%, the biggest quarterly decline on record. With the U.S. economy in the midst of its deepest recession since the Great Depression, it is difficult for some investors to understand how the S&P 500, the United States’ most commonly followed broad market index, can be less than 5% off its all-time high. There are several factors contributing to this perceived disconnect, but the driving force holding up markets has been government support — both monetary and fiscal.

Equities continue to move uphill, and all signs point towards a successful reopening and a revived economy. Right? That certainly is the assessment of stocks as the benchmarks continue to rise and the S&P 500 now sits about 100 points away from its 52-week high $3,373. But the direction of stocks is not the only arbiter of market and economic health. Let’s look at the bond market, which certainly does not support a “bull market” scenario. At the start of the year, the yield for the 10-year U.S. Treasury — a bellwether of investor sentiment towards the economy — stood near 2%. On Thursday, the 10-year Treasury yield broke below its support and is down to 0.58%. In other words, bonds are signaling bad economy and bad markets ahead.

We continue to monitor the effects increasing Covid-19 cases are having on economic data. In aggregate, we see a flattening out rather than a dramatic decline in a number of indicators, as backtracked reopening plans have focused on high-risk activities and enforcing mask requirements rather than broad-based shutdowns. Real-time measures of employment from HomeBase, along with restaurant and travel data from OpenTable and TSA checkpoints, confirm these trends.

July 4, 1776 marks the birth of the United States as a sovereign nation, the day the Continental Congress formally adopted the Declaration of Independence — though the actual vote for independence took place on July 2. Every now and then many Americans, me included, need a refresher on what led the colonies to declare independence from Britain, and the eight years of war that won it. Below is the broad arc of the story.

The markets had their day in the sun with a V-shaped recovery in 2Q20, but now it is the economy’s turn. The National Association of Realtors Pending Home Sales index jumped a record 44.3% to 99.6 in May, the largest monthly increase since the index began in 2001. The index stood at 105.0 last May. The strong gain in the housing sector was a catalyst that the market needed after last week’s slump. Two important June economic releases to watch for this week are ISM Manufacturing, which is expected to continue its comeback; and the U.S. nonfarm payrolls, aka the jobs, report — the unemployment rate is expected to drop to a 12-handle. Nonfarm payrolls will be released a day early on Thursday, since markets will be closed on July 3 in observance of Independence Day. It is good to see positive economic data and would be a lot better seeing Covid-19 cases drop across all states. Expect more volatility but with positive surprises. It is a welcome sign, albeit early in the early innings of the game.

The standout performer in June has been emerging markets (EM) both during market surges and pullbacks. One month does not make a trend, but it is worth looking into the drivers of a purportedly “risky” trade that has featured both positive upside and downside capture ratios. Who would have thought that EM was the place to be, with all the “fits and starts” of re-opening the world’s economies? One thing for sure is that emerging markets are not “your father’s Oldsmobile.” The original BRIC — Brazil, Russia, India and China — which put Brazil first and China last is long gone.

The Conference Board Leading Economic Index (LEI) for the United States increased by 2.8% for the month of May. According to Action Economics!, this is a record increase in a series extending back to 1959, and reminds us that in March an LEI reading of -7.5% marked the series’ record decline. More good news in manufacturing as the U.S. Philly Fed manufacturing index rocketed 70.6 points to +27.5 in June. Meanwhile, global central banks continue massive stimulus, led by the Bank of Japan. Credit markets are the big beneficiaries, continuing to “catch a bid” from better economic news but especially the Federal Reserve’s corporate buying in the secondary markets.

The Federal Reserve threw a bucket of water on a market that was on fire. At its June FOMC meeting, in the face of the encouraging employment report a week earlier, Fed Chair Jerome Powell landed a pessimistic punch by pointing out that the pandemic also poses “considerable risks to the economic outlook over the medium term.” This was surpassed only by the post-meeting press briefing, where Powell discussed the potential structural damage to the economy from job losses, and guessed there could be millions of people who don’t go back to their old jobs, or even find a job in the same industry. So much for “the glass being half full.” Meanwhile, the economic picture brightened with the unemployment rate shrinking unexpectedly to 13.3%, U.S. retail sales for May bouncing up by 17.7%, and the Fed, in an about-face, turning on the spigots with a first-time ever program to purchase corporate bonds in the secondary market that prevented last week’s carnage from spilling over to this week. The biggest news, though, is how swiftly the “Reopening of America” is progressing – though masks abound. Where we go from here depends on the continued generosity of the U.S. Federal Reserve and how fast the U.S. economy gets “back to normal.”

Market sentiment is difficult to measure accurately, as different indicators may give conflicting signals. Voya’s proprietary index measures sentiment through a statistical process that aggregates various survey-based indicators as well as market-based indicators, and isolates the most important factors driving those indicators. Timing market tops, i.e., with excessive sentiment, is notoriously difficult so we tend to put more weight on this indicator during oversold readings. That said, current levels — which seem to indicate overbought conditions — imply a higher potential for near-term consolidation or market pullback, as we’ve seen in the last few days.