Weaker Data, Warmer Sentiment

With COVID caseloads spiking in the US and UK, authorities have tightened lockdowns, and economic data released last week seemingly registered the impact. But contrary to what we normally observe in the financial press this soon after a big equity market downturn ends, many financial commentators we follow are largely taking a longer-term, rosy view. Much of the coverage we encountered envisaged COVID vaccinations enabling a return to normalcy—and an economic recovery in the near future. To us, this is another indication sentiment has warmed considerably in recent months, which we think is likely boost equity markets as the year unfolds.

The latest UK and US economic data show lockdowns affecting activity, with service-related industries taking a harder hit than manufacturing. UK monthly GDP fell -2.6% m/m in November lockdowns took hold once again.^[i] Services output fell -3.4% m/m, but industrial production dipped only -0.1% and construction rose 1.9%.^[ii] Factories’ remaining open helped cushion GDP’s decline relative to both consensus expectations for a -5.8% dip and last spring’s sharp plunge, as manufacturing output rose 0.7% m/m.^[iii] While the US doesn’t report monthly GDP, a similar disconnect is evident in other US data. Led lower by food services, December retail sales fell -0.7% m/m, missing expectations for a 0.1% rise.^[iv] But industrial production rose 1.6% m/m in December.^[v] It has now risen in seven of the last eight months.

Whilst the specific numbers above may have topped or missed expectations somewhat, none of them provide anything really surprising, in our view. For one, purchasing managers’ index surveys have hinted at these numbers for weeks.^[vi] Two, based on our reading of the news, perhaps the most common fear after lockdowns began lifting last spring was a wintertime second wave. Virtually every expert in the field said one was likely, requiring a return to lockdowns. Our research indicates markets are efficient, quickly incorporating common views, opinions and forecasts about how the next 3 – 30 months may look. We think they price those views in advance—and in this case, that included renewed lockdowns.

Now it seems, consciously or unconsciously, most financial commentators we follow have discounted the lockdowns’ effects, too. Many are taking a similarly longer perspective and seeing a brighter future despite the weak data now. In the US, they say renewed lockdowns and expiring CARES Act support weighed on demand, but argue further financial aid and vaccinations should boost activity later. As one report noted: “The second pandemic stimulus package signed at the end of last month should help retail sales recover in January and throughout the first quarter of 2021.”^[vii] Many analysts effectively echo the views expressed by America’s National Retail Federation in its 2021 outlook: “‘Consumers are dying for interaction.’ … ‘People are longing for togetherness, to shake hands, hug, high-five. Once we all get vaccinated, there will be a huge rejuvenation of retail, travel, foodservice, theaters, concerts.’”^[viii]

The glass seems half-full in the UK as well. Most coverage we encountered expects the economy to improve as vaccines roll out further and lockdowns ease. One viewpoint we found to be representative states: “Britain’s roll-out of vaccines—which has been faster than elsewhere in Europe—was a reason to be hopeful.”^[ix] As an economist quoted in another mentions, “… But while the economic story today is of only the second-ever double-dip recession on record, the story of the year will be a vaccine-driven bounceback in economic activity for sectors like hospitality and leisure.”^[x] A fairly rose take, indeed.

That sunnier outlook is rational, in our view. With vaccinations ramping up, we think there is an increasingly visible roadmap to lockdowns ending, enabling a return to normal activity. Recent reports from the Office for National Statistics and US Bureau of Economic Analysis indicate household balance sheets are healthy, and many firms are reporting abundant cash balances. In our view, there is good reason to think businesses can readily meet the apparent wall of pent-up demand once restrictions lift. Last summer’s swift rebound in many economic indicators shows reopening is really all businesses need to expand.^[xi]

Given we also observe pockets of scepticism toward other market-related topics, we think emerging enthusiasm still has room to rise—and in our view, it can provide equity markets a nice tailwind for the foreseeable future. Eventually expectations will likely get too lofty, signaling the end of this period of rising equity prices (otherwise known as a bull market) may be approaching, but we don’t think that time has arrived yet.