September has been an intense month and a rollercoaster for the equity markets. On one hand, there is some good economic data. On the other hand, the U.S. Federal Reserve (FED), the National Bureau of Economic Research (NBER), and the S&P 500 seem to be indicating negativity or at least caution. What is going on?

Since June, we have seen a steady improvement in the S&P 500 index and many economic indicators, causing many investors to posit that this might be the shortest recession in history. However, over the last couple of weeks, concerns around the economic recovery have seeped into the marketplace again. As a result, the S&P 500 index fell almost 10% by September 23 from its all-time high on September 2, 2020.

Bloomberg’s High-Frequency Tracker, which tracks the weekly change in economic data since the beginning of the year, has been trending positive with several indicators trending towards green (i.e., positive) from red (i.e. negative). A few of the indicators such as U.S. Jobless Claims and the Bloomberg Consumer Comfort index provide key insights into the employment picture and the future spending habits of the consumer.

U.S. Jobless Claims¹ reflects the number of newly unemployed individuals, and has been declining over the last several months, down significantly from its peak in April. Consumer confidence as evidenced by the Bloomberg’s Consumer Comfort Index was up at 50 last week from a low of 35 in May. In addition, U.S. Purchase Mortgage Applications², a housing market indicator, are at year-to-date highs.

All of this positive economic data, increasing consumer demand, and a boost from temporary fiscal incentives enacted globally, have led The Organization for Economic Cooperation and Development (OECD), to upgrade their 2020 forecast for U.S. GDP to -3.8% from -7.3%.³

Even with all this positive data, the NBER business cycle dating committee, “held off from an official call on the recession’s end.”⁴ In addition, last week the U.S. Fed Chair, Jerome Powell said the “U.S. economy faces a long uncertain recovery”. One of the reasons for caution is that interpreting the economic data remains challenging. While many indicators are steadily improving, there appear to be two sides to the data – the good news and the bad news. Yes, jobless claims have been declining meaning fewer new people are filing for unemployment. However, what the data does not show is how the pandemic has affected those who are still employed. As of August, 17 million workers (10% of the workforce) will be getting paid less due to the pandemic through pay cuts and fewer hours.⁵ That is on top of the 8.6%⁶ of the workforce that is currently unemployed through August.⁷ With the fiscal stimulus abating, lower incomes and unemployment could eventually put negative pressure on consumer spending, which drives two-thirds of the US economy. August retail sales started to show this weakness, with retail sales growing at a slower pace than earlier in the summer.⁸ On the housing front, there are also winners and losers. U.S. Purchase Mortgage Applications were up 18%, as of September 18, as those still employed took advantage of lower interest rates to buy houses. However, many homeowners are still struggling to make mortgage payments. At the end of the second quarter, the delinquency rate for mortgages on one-to-four-unit residential properties increased to 8.2% according to the Mortgage Bankers Association (MBA) National Delinquency survey⁹, the highest overall delinquency rate in nine years.

Evaluating economic data is important for investing and while some of the data appears to be trending positive, uncertainty remains. Furthermore, the economic outlook is still heavily dependent on the duration of the disruption from COVID-19.

Good Judgment’s Inc.’s SuperForecasters probability of an FDA approved COVID-19 vaccine that is widely used and distributed in the U.S. between October 2020 and March 2021 declined from 70% at the beginning of September to 55% at the end of last week. A delay in a suitable solution to the health crisis will weigh on the economic outlook. Coincidently, the SuperForecaster’s probability peaked on September 4 and hit a low of 52% on September 24, similar to the trading pattern seen in the S&P 500 index. Good Judgment is a project that was developed from the University of Pennsylvania in 2011 and currently provides a public dashboard on forecasts for the COVID-19 recovery. The forecasts are based on information from companies developing vaccines, public health sources such as the FDA and CDC, and the federal government.

COVID-19 developments, election results, and fiscal stimulus negotiations will drive volatility in the investment markets over the coming months. However, we believe the unwavering monetary stimulus we have seen from the Federal Reserve and their commitment to keeping interest rates close to 0% until 2023 will support financial conditions, offsetting some of the economic drag from COVID-19 disruption. For long-term investors, it is imperative to maintain discipline, avoid market timing, and ensure that portfolios are strategically positioned to meet investment objectives.

1. September 24, 2020, Department of Labor Unemployment Insurance Weekly Claims
2. September 18, 2020, Bloomberg, US Purchase Mortgage Applications Index
3. June 2020, OECD Economic Outlook, Volume 2020, Issue 1
4. Sept 23, 2020, Bloomberg, Is the U.S. Recession Over? Official Panel Isn’t Ready to Say So    
5. September 20, 2020, WSJ, No Job, Loads of Debt: COVID Upends Middle-Class Family Finances
6. September 24, 2020, Department of Labor Unemployment Insurance Weekly Claims
7. September 23, 2020, U.S. Department of Labor, Employment situation August 2020
8. September 16, 2020 U.S. Department of Commerce, Advance Monthly Sales for Retail and Food Services, August 2020
9. August 17, 2020, Mortgage Bankers Association, Mortgage Delinquencies Spike in the Second Quarter of 2020