June 12, 2020
Recovery: US high frequency data (traffic, employee time management and weekly claims for example) continues to suggest a steady rebound in overall US activity, but there’s clearly a lot of variance between states. A Reuters article this morning citing Homebase data noted employment is back to pre-shutdown levels at companies that opened quickly. Data also showed retail foot traffic across the country last week was within 20% of last year’s pace and ~33% of states have seen a full recovery. Reports also discuss signs of increased infection rates in areas with increased economic activity.
Liquidity: The most significant driver of asset valuations is financial conditions. This includes things like interest rates, bond yields, currency levels and money supply. At the moment, every one of those variables in the US points to easy financial conditions/higher asset values. Interest rates are at zero, bond yields are under 1%, a decade of dollar strength has partially retraced and money supply is booming. The latest Fed data (through May 31) shows money supply increased +23.1% year-over-year, up from +18% last month. For perspective, money supply peaked at +10.3% in the wake of the 2008 financial crises. When the present period of uncertainty fades, that money will need to go somewhere…cash yields 0%, bonds yield 0.7% and equities are valued with 10-year normalized cash flows and the lowest discount rate in your lifetime. We should expect wide dispersion between individual equity performance given with these conditions.