In the United States, Memorial Day weekend marks the unofficial start of the summer season, but this year’s outdoor activities, home improvement projects, and social occasions are taking place in a post-pandemic America. In this scenario, assessing near and long-term market conditions is a complex task. Emotions are high as we all contend with quarantine restlessness, the lure of warmer weather, anxieties about COVID-19 contagion, and the risks of a “second wave.” Below are some thoughts on how we’re thinking about the months ahead.

Open for Business, with Caution
Different states are implementing different reopening scenarios based on their population, known case numbers, and general preferences. Suffice to say that in some form or another, much of the US economy reopened over the weekend of May 23. Traffic appears to be returning to some big box retailers and people appear to be going out and spending money. Images of packed beaches and pool parties aside, it seems that social distancing guidelines, sanitization procedures, and mask protocols are being widely observed as part of the general public’s adjustment to the “new normal.” The effectiveness of these measures will become evident in the coming weeks, serving as an early-summer litmus test on the current state of the virus.

Second Wave Contagion Risks
The strength of the reopening is likely less contingent on case counts than it is on the ability of hospitals nationwide to continue to provide treatment for seriously ill patients and managing overall COVID-19 fatality rates. Put another way, a case count increase will probably not prove as damaging to reopening sentiment as an increase in fatality rates. This calculus is admittedly grim, but unfortunately necessary in ascertaining the staying power of the post-crisis economic recovery. Near-term consumption numbers will remain weak, but it’s important to ask whether this is a function of consumers being held back by remaining lockdown measures or a function of COVID-19 apprehensiveness. For now, we are leaning toward the former in the belief that old spending habits will eventually return.

Other Market Considerations
For now, the bear case for the markets remains consensus, with the second wave contagions and criticism of federal market interventions (too much or too little) serving as leading arguments. The coming weeks are likely to provide answers about the effectiveness of the March/April lockdown and whether or not estimates about the virus’s continued spread and lethality are accurate.

We started off the year saying that housing in the US might be underappreciated. It’s possible this was delayed – not derailed – by the virus. Housing prices remain unchanged, rates are low, and inventory is low. The US housing market may be about to start picking up steam.

Market bears are likely to turn soon to criticism of valuations. As we always say, valuations don’t matter, risk appetite does. What investors in aggregate are willing to pay for a given level of earnings or cash flow is a moving target driven by risk appetite. Historical valuations are therefore of little use, and as long as risk appetite remains healthy, there’s no telling how much investors are willing to pay for those earnings. There is evidence that spreads are starting to rally and we are seeing early signs of a sector rotation, with cyclicals starting to perk up. While we are not big fans of the 200-day moving average, trend-chasers could switch to more risk if positive signals remain.

Federal aid spending
The Paycheck Protection Program and unemployment benefits are set to expire at the end of July. We believe Congress will reach agreement to renew aid spending, including funding for use by state and local governments, which have been hammered by the crisis.

US and China tensions are likely to remain high – both President Trump and presumptive Democratic Party nominee Joe Biden will continue to criticize China as part of their broader campaign platforms. In Europe, there is evidence of France and Germany nearing agreement with the Frugal Four (Austria, Denmark, the Netherlands, Sweden) on a €500 billion European Recovery Fund. While this isn’t enough to answer significant debt challenges on the part of some European Union members, what it signals about the future of European fiscal and commercial integration is very important.

The Checklist

Issue Comment
Is the economy restarting?
Slow and steady, uneven – the worst appears to be behind us.
The ability and effectiveness to social distance is creating a bifurcated restart.
Are businesses coming back on line?
Easy social distancing is improving: Health & Beauty, Recreation, Retail/Wholesale
Difficult social distancing is struggling: Arts & Entertainment, Bars & Lounges, Lodging
Are small businesses restarting?
Slowly recovering – Retail and Leisure seeing biggest improvement
Are people getting out and about?
Yes – but with a preference to avoid crowds,
e.g.: use a car vs public transportation, air travel
Are consumers spending?
Winners: Fast Food, Grocery, Home Supply Stores, Discount & Variety Stores
Losers: Lodging, Air Travel, Department Stores, Leisure, Restaurants

Are Consumers Spending?

MBA Weekly Mortgage Purchase Applications (5/12/17–5/8/20)
MBA Weekly Mortgage Purchase Applications
Source: Natixis PRCG, FactSet, Bloomberg

ASA Staffing Index (1/5/15–5/11/20)
ASA Staffing Index
Source: Natixis PRCG, FactSet, Bloomberg

Redbook Retail Sales (5/15/17–5/15/20)
Redbook Retail Sales
Source: Natixis PRCG, FactSet, Bloomberg

Retail Sales (5/15/17–5/15/20)
Retail Sales
Source: Natixis PRCG, FactSet, Bloomberg

Is the Economy Restarting?

NY Fed's Real Activity in Real Time
Weekly Economic Index (1/5/08–5/12/20)
NY Fed Real Time Activity 2008 2020
Source: Natixis PRCG, New York Federal Reserve, Oxford COVID-19 Goverment Response Tracker

NY Fed's Real Activity in Real Time
Weekly Economic Index (1/5/18–5/12/20)
Fed Real Time Activity 2018 2020
Source: Natixis PRCG, New York Federal Reserve, Oxford COVID-19 Goverment Response Tracker

Oxford Lockdown Index: United States (2/1/20–5/19/20)
Oxford Lockdown Index US
Source: Natixis PRCG, New York Federal Reserve, Oxford COVID-19 Goverment Response Tracker

Business Closure Rates (3/1/20–5/14/20)
Business Closure Rates
Source: Natixis PRCG, New York Federal Reserve, Oxford COVID-19 Goverment Response Tracker

What Is the Market Telling Us?

Stay Home vs. Reopen Composites (12/31/19–5/15/20)
Stay Home Vs Reopen Composite
Source: Natixis PRCG, FactSet

Reopen/Stay Home (12/31/19–5/15/20)
Stay Home Vs Reopen
Source: Natixis PRCG, FactSet

Reopen Composite (12/31/19–5/15/20)
Reopen Composite
Source: Natixis PRCG, FactSet

Stay Home Composite (12/31/19–5/15/20)
Stay Home Composite
Source: Natixis PRCG, FactSet

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed may change based on market and other conditions.

Natixis Distribution, L.P. is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.