Are We In a V-Shaped Recovery?
June 22, 2020
By Krista Eberly, CFP®
Securities Analyst II
Since the lows back in March, we have witnessed an impressive rally in stocks. As of Friday, The S&P 500 was up 39.2 percent from the March 23 low and is down just 3.2 percent year-to-date.
What has contributed to this strong rebound? Fiscal stimulus from the federal government and all of the policy actions taken by the Federal Reserve. And recently, you are seeing yet another boon for stocks — better than expected economic data.
With states opening back up in May, U.S. consumers opened their wallets and started spending again. Last week, the Commerce Department reported that retail sales rose 17.7% in the month of May (economists were forecasting just an 8.4% increase). It not only blew expectations out of the water, it was also the biggest monthly increase since the records began in 1992! The markets reacted favorably to the report and stocks rallied on the news.
Even though May was a strong month for retail sales, we are not yet back to pre-pandemic spending levels. The chart below from the Wall Street Journal Daily Shot® shows the change in retail sales since February for the various components. The blue bar is the percent change through April; the red bar is through May:
You will notice a wide dispersion among the various components of retail sales, with some areas more negatively impacted than others. The strongest component is non-store retailers (online shopping). With stay at-home orders in place for many parts of the country, consumers had no choice but to do the bulk of their shopping online. Also, this has been an area that has gained more market share in recent years as consumer preferences change.
Why does this report matter? While retail sales are a small component of U.S. gross domestic product, or GDP, they have a ripple effect on the overall economy. For example, you go to a clothing store and buy a new outfit. This leads to that store ordering more merchandise from the manufacturer. Then, that manufacturer will need to buy more raw materials to make the additional clothing items, i.e. the ripple effect. Therefore, if people are out and about spending money, it bodes well for the economic recovery.
This leads us to the bigger question: are we in the midst of a V-shaped economic recovery? The markets believe so; the economic data over the past two months is making a compelling argument for it as well. In April, the data was terrible. We saw record one-month declines in various economic reports. In May, the economic data bounced back. We saw this in the jobs numbers and in last week’s retail sales.
Only time will tell if we are indeed in a V-shaped recovery. It will depend where the U.S. economic data goes from here and if we see a second coronavirus wave in the U.S. Here's what we do know: The U.S. economy has a way to go to get back to pre-virus levels, but it is starting to move in the right direction. This is a positive and we hope it continues.
We are coming up on the halfway mark for the year and it is crazy to think how much has transpired in just six months! Have you reviewed your portfolio yet this year? If not, and you would like to schedule a mid-year review, please give us a call! You will be pleasantly surprised to see how your portfolio looks since March.