Morning Notes — Case Rebound

Jobs: Weekly claims came in at 1.48M down from 1.54M and 1.56M in the prior two weeks but higher than consensus estimates for 1.325M. While it’s good to see fewer claims each week, the descent trajectory and continuing claims number (19.5M this week vs. 20.3M, 20.6M, 21.2M and 20.8M in the prior four weeks) suggests a leveling off/lingering weakness in labor markets. And the recent ramp in coronavirus case counts won’t help matters. Of course, labor markets are a key component in the economic cycle. The negative feedback loop from weaker labor markets > weaker output > weaker corporate profits > and back again, generally prolongs a normal recession. There’s nothing normal about the Q2’20 recession, which was (past tense) the deepest and shortest recession in history. So short, that the normal, negative feedback loop didn’t get a chance to fully engage. Mission accomplished? Only to the extent that monetary and fiscal stimulus plus a normal epidemiological curve has kept the worst from happening. But the key to the duration of the recovery will still be getting people back to work. The average recovery from a normal recession takes less than 12 months. And it’s very common for markets to retrace higher well-before the economy does. But if that wasn’t a normal recession, it’s highly likely the recovery won’t be normal either.

Fuel: The SPX retracement from the 3/23 low has surprised and frustrated many investors. It shows in the still elevated bearish sentiment figures and still light equity positioning data for individuals, hedge funds and systematic strategies. Today’s release of the weekly AAII (individual investor) survey showed bearish equity sentiment of 48.90, just 3.7 percentage points from the all-time record high that was recorded in early May. Meanwhile, we’re in the middle of the biggest liquidity boom in history and bond yields are at 0.70%. Lower bond yields = a lower discount rate on future cash flows, which increases the terminal value of assets. Will increased bond issuance (to pay for fiscal stimulus) increase supply, lower prices and increase bond yields? Not for the foreseeable future as central bank liquidity more than covers the financing needs of governments.