06/23/2020
Last week’s data releases offered further evidence that the U.S. economy is beginning to recover. Retail sales in May rose far more than was expected, as consumers were increasingly free to spend amid the easing of virus-related lockdowns. Particularly strong were vehicle sales and restaurant receipts. This rise comes on the heels of the far better than expected May jobs report. And while housing starts and building permits in May fell short of expectations, they did rise, and the National Association of Homebuilders index saw a record increase in June. And the index of leading economic indicators rose for the first time in four months, and just the third time in the past ten. 

The economy is by no means out of the woods, however. While the May retail sales report was welcome, it came after a 14.7 percent decline in April, which amplified the magnitude of the rebound, and it remained approximately six percent below the level of last May.1 And the Department of Labor reported that continuing jobless claims remained above 20 million for the seventh straight week.2 Industrial production did rise in May for the first time in three months, but by less than expected, and the gain was mostly attributable to the restart of motor vehicle production, which nevertheless remained approximately 60 percent below its level in February.3 

The National Bureau of Economic Research has determined that the U.S. economy entered a recession in February. It will be some time before it determines when the next expansion officially began, but evidence is mounting that it might have begun in May. Even though the data is more impressive from a sequential perspective rather than in absolute terms, it is increasingly clear that activity has turned higher. But, of course, there are risks to the sustainability of the nascent upturn. It remains unclear just how active consumers will be and how responsive office workers will be to reopened workplaces as long as the virus poses a risk. Also unclear is how many jobs will be lost permanently. The enhanced unemployment provision of the CARES Act is set to expire at the end of July. 

Virus Rates in Some States Cause Closures; The Fed Pushes Congress to Act 

Reports of rising infections in a number of states is a warning that the virus has not gone away and has already prompted some initial commercial response, as evidenced by Apple’s decision to close some of its stores in four states and scattered reports of restaurant closures. And manufacturing, in general, remains weak. The Federal Reserve reports that despite a 3.8 percent increase in May, manufacturing activity remains 17 percent below its pre-pandemic level in February.3 And the energy sector remains under pressure, as the index for oil and gas drilling fell another 37 percent in May after a 28 percent decline in April. CEO confidence remains weak and companies are husbanding cash.

Additional stimulus from Washington is being debated, and some legislation seems likely, but when and of what size, and structured how, remains to be seen. Fed Chairman Powell has urged Congress to act, saying in testimony last week, “The economy is just now beginning to recover. It’s a critical phase and I think that support would be well-placed at this time.” The week ahead will provide additional insight into the state of the economy. On the calendar are reports on new and existing home sales, flash PMIs, durable goods orders, and personal income and spending. 

Global Stocks Rebounded Last Week Though Volatility Remains Elevated 

Last week, U.S. equities rebounded from the sharp selloff the previous week. The S&P 500® Index rose 1.9 percent, led by an eclectic mix of healthcare, communications services, consumer staples, and materials. The VIX index fell fractionally but remained elevated. Smaller stocks fared better, as the Russell 2000 Index climbed 2.2 percent, but still trail the S&P 500 by 11 percent year-to-date. The EuroStoxx 600 index rose 3.2 percent in local currency, but that gain was trimmed to 2.8 percent in dollar terms. The MSCI EM index climbed 1.5 percent in dollars. Overall, the MSCI all-Country Ex-U.S. index rose 1.8 percent in dollar terms. The ten-year U.S. Treasury fell one basis point to 0.69 percent, and credit spreads narrowed slightly. 

Important Disclosures:
Sources: Factset, Bloomberg

1U.S. Census Bureau report, June 16, 2020.
2Bureau of Labor and Statistics release, June 19, 2020.
3Federal Reserve statistical release, Industrial Production and Capacity utilization report, June 16, 2020.

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Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources.  This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor. 

The NAHB/Wells Fargo Housing Market Index is based on a monthly survey of members belonging to the National Association of Home Builders (NAHB). The index is designed to measure sentiment for the U.S. single-family housing market and is a widely watched gauge of the outlook for the U.S. housing sector. It is a weighted average of three separate component indices: Present Single-Family Sales, Single-Family Sales for the Next Six Months, and Traffic of Prospective Buyers.

The Index of Leading Economic Indicators is compiled by the Conference Board, a private-sector consulting firm. The index is designed to indicate the future direction of economic activity. When the index rises, analysts expect the markets to continue to rise, and when it falls, they anticipate a fall in the markets. The components of the index change from time to time, but they generally include interest rates, price movements on the S&P 500, and the change in money supply.

The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees.

The S&P 500 Energy Select Sector Index measures the performance of energy stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted. 

The S&P 500 Financial Select Sector Index measures the performance of financial stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted. 

The S&P 500 Industrials Select Sector Index measures the performance of industrial stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted. 

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.

West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content.

The Russell 2000 Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. The Russell 2000 includes the smallest 2000 securities in the Russell 3000. 

The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region. 

The MSCI Emerging Markets Index captures large- and mid-cap representation across 24 Emerging Markets (EM) countries. With 843 constituents, the index covers approximately 85% of the free float?adjusted market capitalization in each country. The MSCI Emerging Markets Index consists of the following 24 EM country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates, as of December 2017. 

The MSCI ACWI Ex USA Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index targets coverage of approximately 85% of the global equity opportunity set outside the US. DM countries include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK. EM countries include: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Russia, Qatar, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. 

An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

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