Is The Worst Over?

The stock market will likely continue to be buffeted by evidence of current economic weakness versus tentative movements toward re-openings of business activity.  At this point, a notable widening of re-openings would seem more plausible in June or July than May.  But, this expectation is still a positive for stocks.  While there are signs the worst of the economic weakness is behind us, the improvement is just that the rate of decline has slowed.  There may need to be evidence of an upturn for stocks to break to the upside. 

The 3-week decline in Initial Claims is the most touted evidence that the worst is behind us.  But, Initial Claims, at 4.4 Mn in the latest week, are still at an extraordinary high level.  And, most of the newly unemployed people remain unemployed, as seen in the further large increases in Continuing Claims.  The latter need to start falling to signal an upturn in labor market conditions through re-hiring.

The Philadelphia Fed's ADS Index, driven in part by Initial Claims, demonstrates the situation (see chart below).  It bottomed on March 23.  But, at -7.2 on April 18, it is still at an extraordinary depressed level.  Its low was -3.7 in the 2008 recession.

This week's US economic data should continue to show the effects of the shut-down.  The most important for the markets should be Wednesday's advance report on Q120 Real GDP.  Consensus looks for -4.0% (q/q, saar) while the Atlanta Fed model's projection is -0.3%.   If 10-20% of the economy was shut down in the last half of March, the print should look more like consensus, if not even weaker.  But, much of the job losses in March were in low-productivity sectors, such as restaurants and hotels.  So, Q220 GDP may not have been hit as hard as the labor market, and there could be some upside risk attached to the consensus estimate.

Other data this week, such as April Mfg ISM, should reflect the shutdown and is old news.   Consensus looks for the Mfg ISM to drop to 36.7 from 49.1 in March.  The print is not likely to have a large negative market impact.  In contrast, this week's FOMC Meeting could be a positive.  The Statement could promise that a large amount of liquidity will remain in place until a sustained pickup in the economy is evident.  Or, it could keep what was said in the March Statement: "The Federal Reserve is committed to use its full range of tools to support the U.S. economy in this challenging time and thereby promote its maximum employment and price stability goals.... The Committee will continue to closely monitor market conditions, and will assess the appropriate pace of its securities purchases at future meetings."  In either case, the Fed is not an impediment for an economic recovery.


 ADS Index (level)

       1/1/20                                                         3/23              4/18


Note: The Aruoba-Diebold-Scotti business conditions index is designed to track real business conditions at high observation frequency. Its underlying (seasonally adjusted) economic indicators (weekly initial jobless claims; monthly payroll employment, monthly industrial production, monthly real personal income less transfer payments, monthly real manufacturing and trade sales; and quarterly real GDP) blend high-frequency and low-frequency data.

The average value of the ADS index is zero. Progressively bigger positive values indicate progressively better-than-average conditions, whereas progressively more negative values indicate progressively worse-than-average conditions.