The renewed Civil Rights movement triggered by last weeks shocking murder of an African American over a tortuous 8 minutes and 46 seconds may be the tragic change-agent straw that will leave an indelible mark upon our society. Hopefully the unified record response to the Covid-19 pandemic will be exceeded with a fervor in actions to address racially connected social and economic injustice staining America’s position among first world countries. Thus far, the stock market appears agnostic, lacking fear of further economic impairment from this explosive issue or the pandemic. A major financial buffer calming the investment outlook has been several Trillion in Government replacement dollars that have sharply boosted income and savings to combat a calamitous collapse in personal consumption. While welfare efforts are replacing most of, if not more than, the average income of lower wage earners, creating the kinetic energy of potenial demand, the ability to spend while isolating at home is limited near term. A Savings rate under 10% is normal. With a record 33% of income less expenses being quarantined in savings and stock accounts, it’s just a matter of time before the falling fear factor of public places and a more open economy allow people to increase consumption at record rates to revert back to mean activity levels.
There is still a long way to go, but we can see here how people are gradually lowering their walls of fear and starting to revive the critical Service Sector that comprises over 77% of our economy. Just 24% currently feel it’s safe to fly, but bookings are on the rise as the economy opens and the healthier young workers snap up bargains.
The progress of reopening of the economy is also split by political party. Republican led states are opening up for business earlier, able to earn and spend without as much viral concern, in part due to lower population densities. The slow but steady improvement from all states should manifest later this summer as the virus fears fade and seasonal activity reaches its peak before Labor Day.
A Covid vaccine or effective treatment for the masses are still more of a 2021 hope, yet the recent 2 to 3 months of national lock-downs and massive unemployment are compelling an increasingly urgent march to opening the economy back up here and across the globe, regardless of the potential for a resurgent virus. Germany has led Western countries in avoiding the worst of Covid and naturally is leading the way out. German and Austrian vehicle traffic is at 50 to 110% of normal in most cities.
The US is more in sync with Global reopening levels, having rebounded more modestly. Los Angeles is above normal in the US at less than 40% of last years average traffic congestion currently, according to TomTom (see chart below). Using another proxy (not shown), Apple’s mobility index for public transportation, there is an uptrend starting from ~ 20% of normal in early May to the upper 30’s by early June, the best levels since March 18th.
One more measure using Open Table’s app for restaurant activity (see chart below), shows Germany again leads the path higher with their more reopened economy and reduced Covid fatality fears. As US sates inch their way to opening, we can see here a mild uptrend venturing out to eat starting in mid May. Now at 81% below normal in the US and most of the Globe, this trend should continue to the less devastating German levels this summer as more states allow and encourage public interaction. US Restaurants allowing a limited seating of diners are now roughly at 33%, up from essentially zero a couple weeks ago.
The market is a discounting mechanism that normally looks about 6 months ahead. Before the Fed called the low in stocks on March 23rd with their multi-Trillion dollar liquidity programs, the end of the world for the 1st half of 2020 was in process of being discounted in stock values along with a strong 2nd half of the year. Ever since the March bottom we have had a steady flow of stimulus, better than expected Covid outcomes and a surprising flood of economic metrics that were not as bad as feared. As the Fear subsides leisure will return, driving more business to expand faster than expected. Most analysts are surprised by this persistent 11 week equity rally as there are still major concerns with the Government keeping 20 Million, mostly low income, people from working. However, a healthy “wall of worry” that doesn’t keep worsening can become the fuel which Bull markets need to maintain future growth potential. Some of those worries can increase and temporarily derail this overbought stock market that is up 40% with near record overbought option trader sentiment. The two primary exogenous concerns are: a Cold War escalating with China and stubbornly high virus fatalities that could subside too slowly or rise this summer. The market is vulnerable short term to a 10%+ correction, but the longer term outlook is positive as we traverse back toward normal, propelled by excess liquidity and returning jobs that slowly heat up the US and Global economy. The biggest upside shock potential for stocks would be any a vaccine or scalable treatment for Covid available before year end 2020.