Rally Mode?

Last week demonstrated that expectations of a re-opening of the economy dominate current economic weakness as the motivating factor behind the stock market now.  So, news about steps toward re-opening will be important while weak economic data will be ignored or discounted unless the market has overshot on the upside and needs to correct.  This week's data, expected to show weak inflation and retail sales for April, should not derail the market's rally.

This way of understanding the driving forces behind the market is likely to be in effect into the summer.  With states only beginning to re-open businesses, and doing so slowly, the economic data are likely to remain weak at least for May and June.  But, the weakness should diminish over this time frame.  For example, at this point, the Claims data argue for a smaller decline in Payrolls in May than in April (-20.5 Mn).   Diminishing weakness should support expectations of a return to a fully operational economy at some point.

Problems, however, are conceivable for late in the summer.  Stocks could become impatient with the speed of economic recovery, particularly if the rally has run too far.  By August or September, there should be evidence whether growth has turned up in Q320.  In addition, there could be two other concerns that will begin to take center stage then -- /1/ the risk of a resurgence of the coronavirus in the fall and /2/ uncertainty about the outcome of the Presidential election.  While these two concerns could stop the rally, they may not be enough to push the market down sharply at that point, partly because these concerns should be well publicized.  A significant hit to the market may require a bad realization of one of these concerns, which will not be known until October/November.

This week's US economic data should continue to reflect the extreme weakness stemming from the shutdown.  Consensus looks for huge declines in the April CPI (-0.7% m/m Total and -0.2% Core),  Retail Sales (-12.0% m/m Total and -8.6% Ex Auto), and Industrial Production (-11.0% m/m).  These should be discounted.  Motor Vehicle companies are scheduled to re-open their plants in May, and manufacturing in general is a sector amenable to early re-opening.  Their resumption of production will add to May IP and moreso in June.  The weakness in Retail Sales may have more to do with the shutdown of stores than with the loss of income stemming from unemployment.   The majority of job losses were in low-wage industries.  For the laid-off in many of them, the combination of Unemployment Insurance Benefits and the $600/week stimulus check exceeds what had been their wage income.  So, when the stores re-open, spending could bounce back.