A Slowing Pace of U.S. Recovery is Emerging

Jul 24, 2020 | Nick Scholte


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In addition, U.S./China relations continue to deteriorate. Absent Covid-19 concerns, this week's consulate closures and the rhetoric of the respective leaders alone would have been enough to drive a material market decline.

To my clients:

It was a down week for North American stock markets with the Canadian TSX finishing down 0.8%; the U.S. Dow Jones Index finishing down 0.8%; and the U.S. S&P 500 finishing down 0.3%.

In recent weekly updates, as well as with my quarterly review letter sent yesterday to discretionary clients, I’ve made the assertion that the low hanging economic fruit has been had. By this I mean that as economies – particularly the U.S. economy - began re-opening, there has been a reflexive economic bounce from the prior closures. Indeed, this recovery has certainly looked like a “v” (emphasis on “lower-case” v) to date. But as I have written, I believe further gains will be much more difficult in the weeks and months ahead. A full upper-case “V” recovery returning economic activity all the way back to the levels enjoyed in December 2019 just does not seem a credible expectation to me. In my opinion, the rate of recovery from this point forward will materially slow, and possibly reverse if the current surge in Covid-19 cases, and now deaths also, continues.

Case in point – weekly jobless claims. Economists expected 1.300 million workers to file claims this week, a 7,000 claim decline from the prior week’s number of 1.307 million. Instead, the number came in 109,000 claims higher at 1.416 million. Clients will recall that, in the past, one of RBC’s most watched metrics for getting ahead of any economic slowdown was the number of Americans filing for unemployment benefits each week. In better times, it was RBC’s contention that these claims would begin to materially spike ahead of any broader economic slowdown. It was the indicator we were watching most closely to assess the probability of a looming recession. Of course, the rapidly enforced shutdowns brought about by the Covid-19 pandemic rendered this normally predictive tool useless. But it still retains utility and we/I still watch it closely. This week saw jobless claims turn up for the first time since the onset of the pandemic. Of further concern, with 1.416 million people seeking benefits this week, claims have turned up at a level that would previously have been unheard of. In fact, this week’s claims number is more than twice as high than at any other point in the 40-year history of this measure.

I don’t want to place too much emphasis on this one metric, nor do I even want to suggest it remains as important as it has proven to be during prior economic cycles. The distortions caused by the pandemic are just too large to expect any traditional economic indicator to remain as relevant as was the case during pre-covid times. BUT, the 109,000 “uptick” this week (during nearly any other pre-pandemic environment, 109,000 new claims would have been considered an alarming surge, not just an “uptick”) highlights that the economy is NOT in the free and clear. Other high frequency data trackers such as the Jefferies U.S. Economic Activity Index also show a material slowdown in the recovery and, in the case of the deeply affected sun-belt states seeing Covid-19 surges (think Florida, Texas, Arizona, California, Georgia etc.), an outright early stage reversal. In other words, myriad material risks remain.

Lastly this week, I’d be remiss if I didn’t mention the continued deterioration in U.S./China relations. As I have mentioned periodically over the past many months, with the November U.S. election inching ever closer, President Trump is sure to try and divert attention from the U.S. pandemic response to that of demonizing China. This week saw tit-for-tat closures of consulates in each country. Further, President Donald Trump today said that the trade accord with China means "much less to me" because of what he called that country's role in the spread of the coronavirus. Prior to covid, this rhetoric alone would have been enough to precipitate a sharp decline in the markets. I personally do not feel that these rising tensions are attracting the attention they deserve.

That’s it for this week. All the best and stay safe,

Nick

Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
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