What Stocks May Soon Need to See

Early evidence of the economy's re-opening supported the stock market last week, but the market is approaching resistance areas.  To break above them, the market may need to see /1/ the re-opening making significant headway or /2/ additional fiscal stimulus.   Neither seems likely immediately ahead, so a pause in the rally is the risk.

An upturn in the labor market would show the re-opening making significant headway.  Businesses would have gained enough confidence in the sustainability of the re-opening to stop firing and bring back workers.   There should be significant declines in Initial and Continuing Unemployment Claims as a result.  But, it may be awhile before the Claims data show significant improvement, possibly only until the extra $600 in weekly benefits expire on July 31.  The extra amount has made total unemployment benefits larger than the working-income of many laid-off people.  So, they have little incentive to return to work until the extra benefits end.

The Administration apparently now is open to more fiscal stimulus.  It is said to favor direct payments to people, independently of the unemployment insurance program.  The Senate is on break until June 1, however.  So, any movement toward passage presumably needs to wait until it returns. 

The latest Claims data were not strong enough to signal an upturn in the labor market.  While Initial Claims fell further, at 2.438 Mn they are way too high and probably have to fall to under 1 Mn to show significant improvement.  Continuing Claims jumped in the latest week, undermining the import of their slowdown in the prior week.  These data point to about a 20% Unemployment Rate in May, up from 14.7% in April.

Other "high frequency" data show a steady, gradual improvement in activity.  But, they remain at very low levels.

Restaurant reservations are up 13% from their April lows, better than the 7% improvement seen at the end of the prior week, according to Open Table.   But, they are still 87% below the year-ago level.

The Phil Fed's ADS Business Conditions Index continues to improve gradually since it hit bottom in April (see chart below).  It is consistent with the careful approach being taken to re-open factories, stores and restaurants.  But, it still shows a very depressed economy.  The Index is "designed to track real macroeconomic activity at high frequency."

This week's US economic data contain mostly backward-looking data.  In particular, consensus looks for -25.8% m/m drop in April New Home Sales, a small downward revision to Q120 Real GDP Growth to -5.0% (q/q, saar) from the advance -4.8% print, -18.1% m/m in April Durable Goods Orders, -6.0% m/m in April Personal Income,  and -12.0% m/m in April Consumer Spending.

There are reasons to ignore or discount most of these data.   The drop in home sales should be ignored, as housing demand appears to be rebounding.  Mortgage Applications for Home Purchase rose for the 5th straight week in last week's report.  While the economic shutdown would be expected to hurt Durable Goods Orders, some of these orders resulted from business decisions made earlier and, in addition to the surge in demand for ventilators, stand as upside risk to the consensus estimate. The expected drops in April Personal Income and Consumption stem from the already-known plunges in Payrolls and Retail Sales.

ADS Business Conditions Index (level)

   Jan 1, 2020                                                              May 16, 2020

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.