May 13, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙 “A staple of my personality is that I want what I want, and I'm willing to do without until I get it." - See who said it and why it matters at the bottom.

1 big thing: The slow drip of economic reality

Illustration: Aïda Amer/Axios

Economic experts including Fed chair Jerome Powell, IMF chief economist Gita Gopinath and a multitude of top market analysts and economists have been saying for weeks that a quick recovery for the U.S. economy is a “fantasy” and likely at least a year away.

  • But average Americans aren't listening, still banking on a V-shaped bounceback from the coronavirus pandemic once lockdown orders are lifted.

Driving the news: The NFIB's latest small business optimism survey showed that a "collapse in sales has led to lower earnings and dampened employment prospects for months to come."

  • "However, small business owners remain optimistic in the face of adversity as more expect the economy to improve ... and expect the recession to be short-lived."
  • Business expectations over the next six months jumped by 24 points from March.
  • And the outlook for business conditions in April rose to the highest in more than 18 months.

One level deeper: Workers have shown similar optimism, with 78% of all unemployed Americans expecting to be rehired in the next six months.

  • However, a new study by top academic researchers projects that more than 100,000 small businesses have closed permanently since late March, with at least 2% of all American small businesses now gone.
  • At least 3% of restaurant operators have gone out of business, according to the National Restaurant Association.
  • Major companies like Neiman Marcus, Forever 21, Gold’s Gym and Modell’s Sporting Goods have announced bankruptcy plans, while 3,000 store closings have been confirmed this year by companies including GNC, Macy's, GameStop and many others.

What's happening: "Consumer confidence is signaling a bit of cognitive dissonance right now," Joseph Brusuelas, chief economist at tax and consulting firm RSM, tells Axios. "People want to believe that their portfolios will recover in one calendar year."

  • A Harris Poll survey of ordinary Americans released today found nearly a quarter (23%) have put more money into the stock market, compared to 19% who have taken money out and 45% who made no changes.

The last word: That "cognitive dissonance" could also help explain why even with an unemployment rate that's likely above 25%, U.S. rent payments have decreased by just 1.5% from comparable May 2019 levels, despite eviction moratoriums.

2. Investors are not buying the stock market rally
Data: FactSet; Chart: Axios Visuals

Equity investors are beginning to sound the alarm on the stock market's big gains over the last month and a half, with even longtime bulls saying the nearly 30% run may have gotten "a little ahead of itself" and away from economic fundamentals.

What they're saying: Stan Druckenmiller, the former chief strategist for George Soros, called the prospect of a V-shaped recovery in the U.S. a “fantasy” during a webcast Tuesday and said government stimulus won’t be enough to overcome real-world problems.

  • Citigroup’s chief U.S. equity strategist Tobias Levkovich said he expects the economy will have problems for "the next few months" and that the bull case for stocks has been over for about six weeks.
  • David Kostin, chief U.S. equity strategist at Goldman Sachs, said earlier this week that investors are dismissing significant concerns, "including $103 billion in expected bank loan losses in the next four quarters, lack of buybacks, dividend cuts, and domestic and global political uncertainty."
  • He expects the S&P 500 will drop 18% in the next three months.

Watch this space: The S&P 500's rally has put the index just below its May 2019 levels but has excluded most institutional investors, who have gone to cash at record rates since late March.

  • Assets in money market funds, which are effectively savings accounts, have reached a record $5 trillion after seeing inflows in each of the past 10 weeks and rising by $1.15 trillion, according to Deutsche Bank.
  • And the U.S. personal savings rate jumped to 13.1% in March, the highest since November 1981.

Be smart: Bank of America's "Bull & Bear Indicator" has been stuck at 0 for weeks, suggesting investors remain extremely bearish, with nine out of 10 calling the gains a "bear market rally" and eight out of 10 expecting a U- or W-shaped economic recovery, rather than a V.

  • Goldman's investor sentiment indicator has fallen to -1.3, also indicating extreme distaste for stocks.
  • Deutsche Bank's data show three straight weeks of equity fund outflows.
3. Catch up quick

Uber's proposal to buy GrubHub is likely to face significant antitrust scrutiny with U.S. representatives saying it shows the need for a moratorium on deals during the pandemic. (Bloomberg)

House Democrats released a "phase 4" $3 trillion coronavirus relief plan that would provide additional aid to state and local governments, hospitals and other Democratic priorities. (Axios)

The Fed began buying ETFs on Tuesday for the first time ever and announced new details for its TALF and PPP lending facility, including plans to disclose the name of each participant in both facilities. (Federal Reserve)

Boeing sold zero commercial airplanes last month and reported new orders for 108 planes had been canceled. (Barron's)

The coronavirus outbreak could be worse in the fall or winter, said Anthony Fauci, the nation’s top infectious-diseases expert. He also warned of additional economic damage if states pushed forward in reopening most businesses before they see dramatic declines in cases. (Washington Post)

4. Record low CPI doesn't mean inflation is dead

Data: Investing.com; Chart: Axios Visuals

The core consumer price index, which excludes volatile food and energy costs, fell 0.4% in April, the biggest drop in the index on record, dating back to 1957. Compared with April of last year, the core CPI rose 1.4%, the smallest annual gain since 2011.

  • March's core CPI reading was also negative, marking the first back-to-back negative prints since 1982.

What it means: "Economic models, as well as lived experience, tell us that prices should be falling with demand in free-fall, and in today’s release it is clear that they are," AllianceBernstein senior economist Eric Winograd says in an email.

  • "Inflation is not the focus of the market, nor of policy-makers, for now or for the foreseeable future."

Yes, but: That may be a mistake, says BlackRock’s CIO of global fixed income Rick Rieder.

  • "There’s a danger in merely extrapolating recent trends, and we think 2020’s broad deflationary influences may well lead to higher rates of inflation next year," he says in a note to clients.
  • "We think that even a modest re-setting of oil prices over the next 18 months could drive 2021 inflation in a manner that offsets some of the declines occurring now."

Between the lines: Both Rieder and Winograd see the "monumental" policy response from the Fed and the government as likely to drive inflation well above levels currently priced in by the market, which Rieder calls "unrealistic and excessively pessimistic."

Don't sleep: David Zervos, chief market strategist at Jefferies, goes further, asserting that "the extraordinary policy response to COVID-19 marks the beginning of the end of the disinflationary era in existence since the early 1980s."

Go deeper: The federal government's coronavirus response risks spiking inflation

5. Three times worse than the Great Recession

Reproduced from Federal Reserve Bank of New York; Chart: Axios Visuals

The New York Fed's new weekly economic index fell to -12 for the week ended May 9, dropping from -11.14 the previous week. The index's decline is now three times greater than the worst contraction seen during the Great Recession.

What it means: "The WEI is an index of real economic activity using timely and relevant high-frequency data," per the N.Y. Fed. "It represents the common component of ten different daily and weekly series covering consumer behavior, the labor market, and production."

  • The index's inputs range from electricity output and rail traffic to jobless claims and consumer confidence and seek to provide a timely snapshot of U.S. GDP expectations.
Dion Rabouin

Thanks for reading!

Quote: "A staple of my personality is that I want what I want, and I'm willing to do without until I get it."

Why it matters: Mara Brock Akil is the journalist turned screenwriter behind the TV series "Girlfriends" (2000–2008) and its spin-off "The Game" (2006–2015), "Being Mary Jane" (2013–2019), "Black Lightning" (2018-present) and "Love Is" (2018-2019), many with husband Salim Akil.