Economy Finding Firmer Footing

ClearBridge Investments: Two positive signal changes re-affirm the overall green signal of the ClearBridge Recovery Dashboard.

    Josh Jamner, CFA

    Josh Jamner, CFAInvestment Strategy Analyst

    Jeff Schulze, CFA

    Jeff Schulze, CFAInvestment Strategist

    Key Takeaways

    • Two positive signal changes re-affirm the overall green signal of the ClearBridge Recovery Dashboard: Financial Conditions to green from yellow and Housing Starts to yellow from red.

    • Stimulus, arriving quicker and more amply than in the past, has been a primary driver of the rapid market and economic recovery.

    • Prospects for further stimulus are bright as long as COVID-19 remains a threat, particularly given the greater challenges faced by Main Street.


    Economic Data Continues to Suggest Recession Already Over

    The weeks following an overall signal change on ClearBridge’s economic dashboards tend to be some of our most sleepless. Often, an overall signal change hovers close to an inflection point, meaning incoming data could push the overall signal to break either way shortly after the initial change. Fortunately, we have been getting more sleep lately as strengthening economic and market trends in July caused two signals on the ClearBridge Recovery Dashboard to improve, further confirming the green overall signal. In other words, our cautiously optimistic view from last month — that the recession has ended, a new economic expansion has begun and a financial market bottom has formed — has gained further validation (Exhibit 1).

    The first positive signal change on the dashboard was Financial Conditions, which improved from yellow to green. It seems longer, but only several months ago financial markets were seeing historic volatility, credit issuance was at a standstill and oil futures briefly went negative. The Federal Reserve’s quick and decisive actions have more than restored market function and order. Our Financial Conditions indicator tracks approximately 100 market-based metrics. Taken together, they are signaling that financial conditions have improved as liquidity has been restored, primary capital markets have re-opened and volatility has declined. With this signal change, the “Financial” section of the dashboard now has two green signals and one yellow signal, making it the strongest of the three sections. This appears consistent with a recovery taking hold on Wall Street before Main Street.

    Exhibit 1: ClearBridge Recovery Dashboard

    Source: ClearBridge Investments.

    The second signal to improve is Housing Starts, which has moved from red to yellow. This change likely reflects the fact that lockdowns have now been lifted across most of the country. With restrictions being eased, an improvement from trough levels is hardly a surprise. Housing starts appear to have bottomed in April at an annualized rate of 934,000, rising modestly in May to 1.01 million. June, however, showed a more solid improvement to 1.19 million, strong enough to drive the signal into yellow territory.

    Historic Stimulus Has Shortened Economic and Market Response Function

    The coronavirus recession has been unique in that policymakers have been afforded unprecedented visibility into the economy. Once lockdowns were implemented, a recession was largely a foregone conclusion. Further, the crisis was not caused by any “bad actor,” making policy support less challenging politically. Against this backdrop, both the Fed and Congress acted swiftly to provide support on a scale previously unseen. As shown in Exhibit 2, the CARES Act along with several smaller packages are not only much larger than past support programs, they have also been enacted quicker. The PPP program was implemented and consumer checks distributed in a matter of weeks following the signing of the CARES Act. Such programs have historically taken much longer, with more than three months passing between the approval and the mailing of consumer checks during both the 2001 and 2008 recessions.

    Exhibit 2: Fiscal Stimulus as a Percentage of GDP

    Source: Congressional Budget Office (CBO), Bureau of Labor Statistics and Bloomberg. Data includes impacts from Economic Growth and Tax Relief Reconciliation Act of 2001 which was passed before the recession began. Stimulus is based on CBO bill scoring as a % of GDP peak prior to recession and only includes Congressional outlays.

    Some provisions of the CARES Act have begun to expire, and Congress is actively working on a fifth stimulus bill. Even though the amount of government support may be shrinking, it is not going away entirely. Overall fiscal policy is set to remain accommodative through 2021 and then become a modest headwind in 2022. We believe policymakers will continue to find ways to provide support to their constituents so long as COVID-19 remains a major economic threat. While political wrangling and a wobbly economy driven by ongoing coronavirus fears could lead to periodic bouts of volatility, we continue to believe that the backdrop for longer-term investors remains robust.



    DEFINITIONS

    The “CARES Act” is short for the ''Coronavirus Aid, Relief, and. Economic Security Act''

    The Bureau of Labor Statistics (BLS) is an American government agency tasked with collecting and disseminating a range of economic and employment data.

    A credit spread is the difference in yield between two different types of fixed income securities with similar maturities, where the spread is due to a difference in creditworthiness.

    The ClearBridge Recovery Dashboard includes 9 leading economic, financial and market indicators that can provide information about the direction of the U.S. economy.

    The Congressional Budget Office (CBO) is a federal agency within the legislative branch of the United States government that produces independent analyses of budgetary and economic issues to support the Congressional budget process.

    COVID-19 is the World Health Organization's official designation of the current novel coronavirus disease. The virus causing the novel coronavirus disease is known as SARS­CoV-2.
     
    The Federal Reserve Board (Fed) is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

    Gross Domestic Product (GDP) is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

    The Global Financial Crisis (GFC), also know as the financial crisis of 2007–08, the great financial crisis and the 2008 financial crisis, was a severe worldwide economic crisis considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s, to which it is often compared.

    The ISM New Orders Index is the new orders component of the ISM PMI.

    The Institute for Supply Management (ISM) is an association of purchasing and supply management professionals, which conducts regular surveys of its membership to determine industry trends.

    Investment-grade bonds are those rated Aaa, Aa, A and Baa by Moody’s Investors Service and AAA, AA, A and BBB by Standard & Poor’s Ratings Service, or that have an equivalent rating by a nationally recognized statistical rating organization or are determined by the manager to be of equivalent quality.

    The Paycheck Protection Program (PPP) is part of the CARES Act and is a loan program designed to provide a direct incentive for small businesses to keep their workers on the payroll.

    The Philadelphia Federal Reserve (Philly Fed) Manufacturing Index rates the relative level of general business conditions in Philadelphia. A level above zero on the index indicates improving conditions; below indicates worsening conditions.

    The tech bubble (also known as the dot-com bubble and the Internet bubble) was a stock market bubble caused by excessive speculation in Internet-related companies in the late 1990s.



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