Although the FTSE-100 ended yesterday (Monday 22 June 2020) lower due to concerns that the coronavirus infection rates are still rising (especially in the US), interestingly US markets weren’t particularly concerned and ended the day higher as economic data continues to point to a ‘V-shaped’ economic recovery.
The Chicago Fed National Activity Index came in much better than expected (+2.6 versus consensus estimates of -10), which is consistent with last week’s strong readings from the Empire State and the Philadelphia Fed surveys.
Additionally, Sherwin-Williams (a US paint manufacturer and retailer) said that while its second quarter sales will be lower than the same period in 2019, the decline won’t be as bad as they originally forecasted in April, as people stuck at home have started to do more home improvements. This is consistent with recent statements from Home Depot and Lowe’s (two US DIY retailers) – and as with the UK, US housing is important as it has a profound effect on the wider economy (as it can improve confidence, encourage consumer spending, contribute to economic output, create jobs, etc.).
Although the UK is behind the reopening curve, this morning’s (Tuesday 23 June 2020) PMI (Purchasing Managers’ Index), also provided evidence of an economic recovery as the readings rocketed higher.
The composite reading had its biggest monthly gain since the survey began in 1998, climbing to 47.6 from 30.0 in May. Although that is still below 50 (50 is the line separating expansion and contraction, so a reading below 50 signals the UK economy is contracting), the manufacturing index climbed to 50.1 from 40.7 (i.e. expansion). The services activity measure rose to 47.0 from 29.0.
All this data suggests to us that not only are we past the low point (as the global economy appears to have bottomed during April and May), but we are already rebounding strongly, hence why we have continuously argued that it was best to focus on the likely duration of the economic decline rather than the depth (for example, please see here, here and here) – as such this is positive for company profits and not only does this mean that equity markets are on a solid footing, but provides a compelling case that the equity market rally can continue.
Investment Management Team