As another week passes in the COVID-19 economy, we remain pretty much in limbo. That said, there are some welcome signs – economies reopening, investors diversifying, and the like – though there are reasons for caution too.
In this post we’ll take a look at updated data and analyze where things could be headed.
Market Momentum
The S&P 500 has been challenging its 200-day moving average over the last week. This is obviously a good sign from a market perspective.
What’s behind the progress? There are four main reasons we’re seeing upward momentum – and remember, markets look ahead, not at today.
First off is positive information on the progress of potential COVID-19 therapeutics and a vaccine. The health outcomes of this pandemic are the foundation of long-term economic recovery, so the more good health news, the merrier. Clearly, markets view this progress favorably.
Second, as of last week, all 50 states are open in some capacity.
Next, the high frequency data we’ve been monitoring continue to improve. Weekly gains can be seen almost across the board:
And lastly, there have been steady, albeit it slow, increases in stock buying activity recently. Like last week, health care continues to lead the way:
All these factors helped the S&P 500 break its upside resistance level of 2,960. Still, questions remain on whether the cloud kings, large e-commerce retailers, top fintech companies, 5G giants, and other “profit from home” COVID-19 stocks can continue to carry the market higher.
In reality, we need to see the market upswings broaden to more industrial sectors, including the ones that have been beaten down during the pandemic. As of last week, we’re starting to see it. There has been strong recovery leadership in the energy, industrials, home building, and financial sectors.
How Will We Pay for Everything?
One thing is clear in terms of the economic stimulus efforts so far – this pandemic has created a huge budget gap. Our guess is it will come out to around $4 trillion, or 20 percent of gross domestic product, when all is said and done.
It’s important to recognize, though, that this debt will not cause the U.S. government to go bankrupt. While our debt is large and growing, it remains manageable because of low interest rates.
Newly issued Treasury debt is going for about 0.25 percent on average. That low rate also allows the government to refinance current debt.
Last week we saw the first issuance of 20-year Treasury bonds since the 1980’s. Encouragingly, there was a strong appetite globally for that debt tranche. Hopefully that continues.
The question becomes, at what point will the Treasury not be stubborn and issue even longer debt, like 50- or 100-year bonds?
As seems to be the answer to an increasing amount of questions these days – time will tell.
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