The surprising thing about the economy

Coronavirus fears are beginning to crash the great stock markets party

June 24, 2020

Good morning. Asia and Europe are mostly lower as the global coronavirus case load continues to spike, particularly in parts of Asia and the Americas. U.S. futures have swung decidedly lower, too. That’s despite encouraging economic data and renewed talk of a new round of stimulus goodies.

Let’s check in on the action.

Markets update Asia • The Asia indexes are mixed in afternoon trade. Hong Kong and Tokyo were down slightly; Shanghai was up. • Tokyo has reported its highest number of new coronavirus cases since May 5. The problem is “clusters in workplaces,” officials say.• Bad reception. Apple’s China iPhone sales fell in May, after a strong rebound in April, suggesting the retail picture in the vital market is still choppy. Europe • The European bourses sank in early trade. Germany’s Dax was off 2%, erasing yesterday’s gains.• The E.U. is set to selectively reopen its external borders on July 1. So far, the U.S. does not make the list of approved visitors, according to the New York Times, as it’s failing to control the coronavirus “scourge.” • The pubs, that mainstay of English life, are set to reopen July 4 as the country continues to ease lockdown measures in a bid to revive the economy. But pub-goers , PM Boris Johnson urges, must use “common sense” to keep infections at bay. Common sense, was something in short supply at my old local off Upper Street a good hour or so before closing, I recall. U.S. • The Dow, S&P 500 and Nasdaq futures point to a negative open. The Nasdaq, at an all-time high, is going for nine straight. It’s looking iffy.• The U.S. economy will exit recession by year-end, Treasury Secretary Steven Mnuchin says, adding a new stimulus package is gaining momentum. The White House and House Democrats want something passed before Election Day.• Cloud stocks are flying— just ask investors in Fastly. To cash in on the mania, Dell Technologies is considering a spinoff for its roughly $50 billion stake in VMware, the Journal reports. Elsewhere • Gold is up.• The dollar is up, too. • Crude is falling, with Brent hovering just above $42/barrel. Surprise! Pandemic forecasting is a fool’s errand. Economists go into the exercise knowing full well their predictions of the future will be wrong—either by a lot, or by a little less than a lot.

As new data come in, they tweak their models, and tweak it again. But, we find, there’s still little consensus on how bad things will get, or, crucially, when a recovery will begin. Does Secretary Mnuchin have any unique insight into the economy when he testified yesterday that the U.S. should emerge from recession by year-end? Or do we listen to the Fed, which, only a week earlier, said, forget about 2020?

In a pandemic, it’s probably wise not to put too much weight into any one forecast. Something like the Citi Economic Surprise index would be a better indicator. What’s the surprise index? It’s a measure of how much the official economic data comes in above or below the aggregate of economists’ forecasts. Here’s what you need to know about the index: a positive reading means the data is surprising to the upside—that is, the actual numbers are better than all those forecasted numbers.

The surprise index has—surprise!—not only turned positive, but it’s at a record high. In fact, we’ve gone from a record-low (the economic warning signs were worse than expected) at the end of April, to a record-high this week. That’s leading analysts at BofA, for one, to conclude the U.S. is on the upward “V” of what will be an “ultra-short” recession, and that corporate earnings will pick up dramatically in the short term. That’s closer to Mnuchin’s optimistic call yesterday than the Fed’s gloomy call last week.

Here’s their longer take:

And this is what the index looks like, courtesy of Raymond James. Cast your eye to the bottom right where you can see the vertiginous drop and then a rocket-launch rebound.

In the past two days, we’ve had some data points that suggest the global economy is undoubtedly beginning to rebound, and rebound strongly. Yesterday, it was PMI numbers. "The big picture is that the economy is now on the road to recovery following the coronavirus lockdowns," Andrew Hunter, senior U.S. economist at Capital Economics, was quoted saying in the WSJ yesterday. Last week, it was surprisingly strong retail sales in the U.S. and Britain.

Taken together, it’s beginning to read: the economy is recovering at a faster rate than predicted.

Not sure if that’s enough to justify these lofty stock prices, but the macro picture is looking better.

***

Have a nice day, everyone. I’ll see you here tomorrow.

Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com

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Today's reads

Trading floor. The New York Stock Exchange made Wall Street history earlier this year when it shut down in-person trading in March, a nearly 150-year first. A lot has happened in those three months, including a resurgence in IPOs. John Tuttle, vice chairman and chief commercial officer of the NYSE, spoke to Fortune's Michal Lev-Ram about what investors need to know about the reopening, plus about direct listings and how the NYSE is handling the shift to WFH and the BLM movement.

The "everything is expensive" rally. Indicator after indicator shows that stocks, at these levels, are expensive. Historically expensive. So why is it that investors can't get enough of them at these prices?

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