ICMYI: Week of June 15th through June 19th
All the world’s a stage, and right now, that stage is full of cautious optimism.
As cities, states, and countries slowly reopen, the markets aren’t quite sure what to make of what’s coming next.
During an economic downturn, your goal as an investor is to look for signs that things are turning around. One way to do so is by keeping an eye on economic indicators. Read the recap below, while keeping in mind your portfolio, making sure to focus on your long-term strategy as well as the implications of international events.
The organization that officially defines recessions, the National Bureaus’ Business Cycle Dating Committee, uses four primary economic indicators as part of their analysis when defining a recession, nonfarm employment, industrial production, real retail sales, and real personal income. You can create an informed investment strategy by paying close attention to reports concerning economic indicators.
Before we dive into a look around the world, there are a couple of terms you should know: Economic leading indicators & lagging indicators. Economic indicators can give you a sense of the economy’s direction, whether it’s expanding or contracting. You can use indicators to determine as a guide for your investment strategy.
Leading indicators are used to predict future trends, while lagging indicators reflect an economy’s historical performance. Looking at one economic indicator will not give you a complete picture of an economy, but it can be a good start.
Last week, China & the U.S. both reported on retail sales & industrial production, leading indicators. Retail sales give insight into how much consumers are spending and industrial production measures the output of mining, manufacturing, utilities, and construction.
The monthly housing starts & permits, another leading indicator for residential building activity, were also released by the U.S. Census Bureau & U.S. Department of Housing and Urban Development.
Let’s take a look around the world and how the markets responded to these reports.
Markets were excited by the retail sales figures. The May retail sales report showed a 17.69% increase in spending. An increase in retails sales could be good news for stockholders because the more people spend, the better the earnings. Industrial production was up 1.4% in May due to more factories reopening. Total production is still way below pre-Covid levels, but the numbers give hope of a turnaround.
While housing starts increased by 4.3% in May, it was still lower than expected. The slight increase means that growth and recovery in the real estate market (specific to housing) could take a while.
Weekly unemployment claims were also released. Claims are another leading indicator of how the job market is faring. New jobless claims continued to decline with 1.5 million new applications. The number of new claims may be much higher than that due to the number of people that applied for benefits under the Pandemic Unemployment Assistance program.
The Bank of England increased the government bond-buying program by an additional £100 billion, bringing its total to £745 billion. Governments often make bond purchases as a way to increase the money supply and spur more lending and investments.
Inflation eased in May in the Eurozone, but personal care services and hospitality continued to decline. Construction production in the Eurozone fell to its lowest levels ever recorded.
Latin America: Two countries in South America are slowly becoming the epicenter of the pandemic due to the rate of infection, Brazil & Peru. As of this writing, there have been over 1 million confirmed cases of Covid-19 in Brazil, with 50,000 deaths. Brazil reported retail sales plummeted 16.8%, the most significant decline ever recorded.
Peru has 251,000 confirmed cases and almost 8,000 deaths. Peru’s economy was down 40% in April. The country is one of the largest producers of copper, gold, and silver. The central bank estimates a 12.5% decline in the overall economy.
Peru is the world’s second-largest producer of copper.
Industrial output was up in May but not as high as expected in China. Analysts expected a 5% gain (actual was 4.4%). The decline was due to factories relying more heavily on the domestic economy due to the decrease in export orders.
Retail sales were down 2.8%, slightly above the 2% predicted by analysts. There is so much uncertainty in China (like many other economies) that, for the first time in two decades, the government did not set a GDP growth target.
There are fears of deflation (overall reduction in the general level of prices) in Japan. Core consumer prices fell by 0.2%.
You would think falling prices would be ideal for consumers, but this is usually a sign of a weakening economy. The Bank of Japan had previously pledged to buy unlimited amounts of bonds to help stimulate the economy.
China announced that they would write off a little bit of the debt owed by African countries. The details, including the amount of the write-offs or the countries that would receive the write-offs, were not made available.
The South African Reserve Bank expects a 7% overall decline in the economy as a result of lockdowns. South Africa, like many other governments, are also evaluating their bond-buying programs to help stimulate the economy.
Some numbers for people who like numbers:
The Dow Jones Industrial Average closed at 25,871 up 1% for the week
S&P 500 closed the week up 1.9% ending at 3,098
Nasdaq was up 3.7% from the previous from the previous week ending at 9,946
MSCI EAFE closed at 1,801 up 2.1%.