All things considered, financial markets have performed well in recent months amid extraordinary monetary and fiscal aid. But the economic outlook became less certain in the second half of June. Many state and local leaders began to loosen restrictions on businesses and shelter-in-place orders in early May, which was well received by risk markets. However, a resurgence in new COVID cases and hospitalizations in many populous states is causing political leaders to reconsider those easements. In Texas, for example, Governor Greg Abbott has once again closed bars and rolled back easements on restaurants and other businesses. While a willingness to broadly reinstitute the lockdowns of March and April doesn’t yet appear imminent, an inability to slow this recent trend in the near term may fuel greater concern in financial markets that fresh lockdowns are coming.
- Broad market functionality is much improved despite the uncertain economic outlook, thanks in large part to the actions of monetary and fiscal policymakers.
- Economic forecasting is as challenging as ever, and the Citigroup Economic Surprise Index posted both the highest and lowest levels on record within a 2-month period.
- Fed leaders have made it clear that there are no plans to reduce the current level of monetary accommodation anytime soon; Yield curve control is being discussed as another potential tool.
Just as the virus has been difficult to predict (and contain), forecasting the ultimate path of the recovery has been equally challenging for economists. The graph above looks at the Citigroup Economic Surprise Index, which tracks actual economic data relative to market expectations daily. In other words, did the data surprise to the upside or downside? A positive index reading infers the former and a negative reading the latter. Notice the wild swing in the index over the last few months. The index tracks data going back to January 2002, and the record low (April 30) and record high (June 30) were reached within two months of each other. It’s yet another example of extreme volatility in the current environment, and there’s been multiple forecast misses by the economist community, most notably the retail sales and jobs reports for the month of May. Both reports were significantly better than expectations, and while economic forecasters were made to look silly, this is one of, if not the, most unique economic environments ever experienced. As such, we would be careful about focusing too much on economic outlooks, including the alphabet soup of recovery trajectories (V-shaped, U-shaped, etc.). There is simply too much uncertainty at this point.
This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com.