Darkest before the dawn: Is the U.S. economic cycle at its low point?
On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Head of AIS Business Solutions Sophie Antal Gilbert discussed recently released economic data from Europe and the U.S., including market reaction to the numbers.
Europe logs negative Q1 GDP, but gradual reopenings offer hope
Negative GDP (gross domestic product) growth rates dominated the headlines in Europe the week of May 11, Ristuben said, with Germany logging a 2.2% decline during the first quarter, while the UK experienced a 2.0% drop in the same period. These numbers are confirmation that real economic damage is being done, he said, adding that second-quarter economic growth across all of Europe is expected to be even more negative.
On the positive side of the ledger, though, most European countries are beginning to reopen their economies as lockdown-imposed restrictions ease, Ristuben noted. The latest country to do so is the UK, where Prime Minister Boris Johnson recently encouraged individuals who cannot work from home to return to their jobs, he said.
“Ultimately, across most of Europe, we’re beginning to see life returning to something resembling semi-normal conditions—and that’s a hopeful sign,” Ristuben remarked.
Amid sobering U.S. data from April, are brighter days ahead?
Turning to the U.S., Ristuben said the latest reports continue to reflect the economic carnage inflicted by the coronavirus, with another 2.98 million jobless claims filed from May 3-9. In addition, retail sales tumbled by a record 16.4% in April, he noted, while the capacity utilization of the U.S. industrial sector dropped to an anemic 64.9%. “While these numbers aren’t unexpected, it’s still a bit sobering to see them reflected in the news,” Ristuben said.
However, in a more hopeful sign, Ristuben noted that many small businesses in the U.S. are expecting conditions to improve in the not-too-distant future. He pointed out that nationwide, 48 of 50 states are easing restrictions to some degree.
“It’s important to understand that all the recent negative economic headlines were due to an increase in necessary government-mandated restrictions. With states beginning to dial back these restrictions, it’s likely that economic activity will subsequently improve,” Ristuben said. He and the team of Russell Investments strategists believe that the U.S. is probably near or at the bottom of the economic cycle now, and that a modest improvement is possible in the months ahead.
“Second-quarter GDP is likely to be absolutely horrible, but beyond that, our central scenario calls for a potential return to modest growth, beginning in the third quarter of this year,” Ristuben stated. He reiterated that while growth rates will probably not be very robust, the overall economic situation will likely start improving.
The latest worry for markets: A second wave of infections
Ristuben said that major benchmarks were mostly down the week of May 11, but only modestly so—especially when compared to the sharp selloffs that dominated most of March. “It’s important to understand that over the past six weeks, nearly every stock market in the world has traded in a relatively narrow range,” he stated. In Ristuben’s opinion, this demonstrates that markets are basically receiving what they’ve been expecting: horrible economic news, and somewhat-better news regarding the spread of the coronavirus.
The recent dip in markets can probably be attributed to the lifting of lockdown restrictions across the U.S. and Europe, he said. Why?
“Oftentimes, when the things markets have been looking forward to actually start happening, markets begin to worry about what will happen next. In other words, markets are always looking out for the next thing—and in this case, it’s concern over a second wave of infections as more economies begin to reopen,” Ristuben explained. The tension between forging an economic recovery while still protecting the health and welfare of individuals is likely to play out in markets over the next several weeks, he concluded.