Better, Better…


Things are better. The economy is better around the world than it was in March or April. According to the IHS Markit Flash G4 PMI output index for June, the economic output score for the U.S., the Eurozone, the United Kingdom and Japan (the four largest developed economies accounting for approximately half of global GDP) surged by a record 12.4 points, building on a prior record leap of 11.7 points in May to push the index up to 45.7 from an all-time low of 21.5 in April.

Chart 1

People’s spirits are better. Life is starting to resemble what we used to know with shops and restaurants and salons re-opening. In May, the ISM Service Sector Business Activity Index (representing about 70% of the US economy) registered a significant rebound, which is expected to move higher in June.

Chart 2

Traffic on streets is busier than a couple of months ago.

Chart 3

Some people are even flying.

Chart 4

These “animal spirits” are being reflected by investors in numerous ways in different markets. As can be seen in the following chart which compares the S&P 500 Index and the VIX Index (a measure of investor fear), investors have bid up equity prices as their fears have subsided.

Chart 5

This has also happened in Europe with stocks rallying strongly there.

Chart 6

The 10 yr. Treasury yield has turned up a bit as has the ratio of copper to gold prices – both of which suggest that economic conditions are beginning to improve.

Chart 7

The Bloomberg Financial Conditions Index, reflecting many market indicators, also shows a rapid financial healing – highlighting that the recession of 2020 might be the shortest, sharpest recession so far ever recorded.

Chart 8

Are markets too ebullient? Have equity security prices moved too far, too fast? Please return to Chart 5 and the VIX index. As can be seen there, while the index has declined significantly, levels are still elevated, suggesting that investors have not totally “thrown caution to the wind”. Further, Chart 9 also demonstrates that investors demand a hefty premium to invest in stocks vs. the safety of the 10 yr. Treasury.

Chart 9

Signs of market breadth have been expanding, which might suggest rally durability. Earlier in June, more than 97% of the stocks in the S&P 500 traded above their 50-day moving averages, a measure that analysts use to track momentum and breadth. This is a rare event. History shows that when this happens further market gains tend to follow. The NYSE (New York Stock Exchange) advance-decline line, a popular cumulative indicator that tracks the number of rising stocks minus the number of falling stocks, recently hit its highest level in two years. In short, markets have moved up, but they are still tethered to reality.


Obviously, the world is not completely back to where it was only a few months ago. There are three main influences which are guiding us and the markets: COVID-19, politics and the Fed. As the news about the pandemic called coronavirus ebbs and flows, peoples’ emotions follow. When news comes that infection rates are down, hospital utilization is down, mortality is down and prospects for a vaccine are near, then optimism runs high. The opposite is also true. For the foreseeable future, the pandemic is the issue. Once people feel safe, they will return to their normal life and the flow of business will again engage smoothly – but not until then. Politics can be incendiary and the election in America in 2020 looks to be contentious. If there is a change of party in power, there could be a re-rating of markets, as tax rates most assuredly will rise for individuals and corporations alike. This is not to say that equity markets will not recapture their highs. But it might take some time as shareholders will take home a smaller piece of the American pie and Uncle Sam will take home a larger piece. Finally, there is the Fed, which so far during this pandemic has executed brilliantly in support of the U.S. economy. As a result of the Fed’s quick actions and pronouncements that more would be coming if needed, investors have been cheered and markets have reacted positively. There is an old saying about which we have commented in the past – “Don’t bet against the Fed”. Right now and through 2022 (as the Fed has guided), interest rates will be low and money will be cheap. That is extraordinary support for markets and fuel for stock prices everywhere. So to sum, the Fed is and will be a stalwart supporter of the economy and markets. This is a powerful backstop and will buttress investors during upcoming troubled times. The pandemic will be stopped. The coronavirus will be cured. It is just a matter of when. But the road to this destination could prove “bumpy” at times. The politics will play out in the near future. Investors should be aware.

Predictions for 2020

  1. No recession is forecast for the U.S. Economy . No – A recession has been declared by the official recession “scorekeeper.”
  2. Inflation in the U.S. will rise, but stay under 2%. No – Inflation has been put to rest for the immediate future.
  3. Interest rates will stay low. Yes – To safeguard the world economy.
  4. Oil prices will remain rangebound & there will be more mergers and acquisitions. No & Yes – Oil prices have been anything but rangebound & still believe there will be mergers & acquisitions due to low oil prices.
  5. Carbon emissions will not fall. Yes – Hydrocarbons are cheap & the environment is taking a “backseat” to the economy.
  6. International equities may have a day in the sun. No & Yes – International securities are beginning to do a bit better with the fall of the dollar.
  7. A tale of two halves, perhaps. Yes – Still looking forward to a better 2nd half of 2020.
  8. Objects in motion tend to stay in motion. No & Yes – Obviously there was a sharp break in the momentum, but there has been a sharp rebound also.
  9. There will be no big policy changes coming out of Washington D.C. Yes – Partisan gridlock is alive & well especially before an election.
  10. Corporate America will continue to reward shareholders. Yes & No – Strong companies will continue to reward their stockholders.

A Final Thought

The opinions expressed in this Commentary are those of Baldwin Investment Management, LLC. These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The reported numbers enclosed are derived from sources believed to be reliable. However, we cannot guarantee their accuracy. Past performance does not guarantee future results.
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