Something that I’ve struggled with over the past few months is how to reconcile the flood of seemingly disparate economic and financial data. By any standard, the current moment in history is very strange and while data is often our best resource for maintaining an objective point of view, I find it difficult to make sense of what I see and read.
Perhaps some of this was to be expected. 2020 has essentially been one big experiment in economics. When you consider how unconventional our actions have been (i.e. record deficits, record money printing, record intervention in financial markets), it makes sense that you’d get unconventional results.
To that end, let’s look at some charts to see where our journey into the unknown has taken us and where we might be headed.
Labor Market
Let’s start with the condition of labor. Prior to the pandemic, the US economy was remarkably strong with unemployment falling to record lows across the board. Needless to say, that all changed dramatically and within two months we went from record low to record high unemployment.
Unemployment peaked at ~14.7% in April and has since ticked down to 10.2%; a considerable improvement, but still worse than what we witnessed at the peak of the Great Recession.
Digging into the unemployment rate a bit we can see how different demographic groups have been impacted. We observe that the unemployment rate has spiked the most dramatically for Black and Hispanic/Latino Americans while White Americans have fared somewhat better.
Looking at the differences between Women and Men we observe that the unemployment rate for Women initially spiked well above that for Men before beginning to converge. This is surprising if we consider the history of previous recessions where we see that Women tended to outperform Men.
The Labor Force Participation Rate has also taken a nosedive off of what was already a disturbing, secular decline.
Overall, the Labor Market remains weak due to realized damage caused by lockdowns and lingering uncertainty about future business conditions. However, the Unemployment Rate has dropped to the peak level we observed during the Great Recession. Whereas the Great Recession took about 20 months to play out, we are (more or less) through the current one, suggesting that the road to recovery may end up being shorter if we are able to manage the virus effectively and timely develop a vaccine.
Consumer Finances
While the observed unemployment trends are exceptionally severe, they are consistent with what we would expect during a recession. Consumer finances tell a different story and provide some evidence on the efficacy of government stimulus.
The Personal Savings rate skyrocketed to a record 33.5% in April owing to the nationwide lockdowns which dramatically reduced the number of places consumers could shop. It has since trended down but remains a staggering 19%. The persistence in the high rate of savings suggests some remaining reluctance on the part of consumers to engage in the real economy. It also reflects the $1,200 stimulus checks received in April and enhanced unemployment benefits that ended in July.
The effect of the stimulus can be more clearly seen by examining the income statistics. You can see the spike in personal income in April; the magnitude of which we have never observed in the history of the series.
By looking at aggregated income statistics you see how different the experience of this recession has been with the past; again, an abnormally large spike in April.
As it turns out, a lot of consumers used their stimulus checks to pay down debt. The delinquency rate on all outstanding consumer debt (mortgages, student loans, credit cards, etc.) declined significantly in the second quarter. This is radically different from what we would expect given the severity of this recession and the experience of ’08.
Consumers took record action to shore up their mortgage payments. Over 60% of mortgages that were 30-60 days delinquent transitioned to current (i.e. borrowers paid all outstanding payments and are back on schedule) during the quarter while less than 10% transitioned to 90 days delinquent. Again, compare and contrast this with the experience of the last recession.
Finally (and this may be the most astounding stat of all), bankruptcies and foreclosures both hit record lows in the second quarter!
By these measures, consumer finances have never been better off at any point in time for which we have data.
Housing
Median home prices continued their seemingly unstoppable march higher in Q2 and reached a new record of $311,254 aided by record low mortgage rates and low supply. Lower supply indicates that home owners are not quite comfortable selling their property in the current environment, but higher prices imply that buyers are certainly willing to put up the money.
Capital Markets
Possibly the most widely discussed story (at least in my world) to come out of all of this has been the performance of financial markets since the March Meltdown. As I have mentioned many, many times on this blog, the Fed has taken extraordinary steps to stabilize (prop up?) financial markets over the past 5 months and the results are evident from the data.
While everyone has been concentrated on the stock market, the story must really begin with bonds and credit. We will concentrate on high yield (i.e. below investment grade…or junk) to illustrate the magnitude of the change. March saw a precipitous rise in yields and spreads for below investment grade issues as investors dumped their holdings and dove into Treasuries. The 10-year Treasury yield briefly broke below 50 bps on March 23rd when the rate on high yield reached a peak of 11.38%. At the time there was a very real risk that the market would seize up entirely.
However, quick action on behalf of the Fed to backstop the market swiftly turned the tide and high yield has been on a tear ever since. As you can see from the below chart, junk bond yields have hardly been lower. Clocking in at 5.41% (as of August 10th, 2020), yields were only lower in February of this year as far back as we have data. Treasuries have hardly budged, so the spread remains relatively higher which indicates a significant risk premium remains, but the fact that low quality corporate debt is this expensive is hard to wrap your head around.
Finally, we come to stocks. The initial collapse in global stock markets was driven in large measure by the degree of uncertainty around the path of the virus. In March, very little was known, and everyone feared the worst. The initial panic caused the S&P to tailspin down over 30%. Put another way, what took 8-months to play out in 2008 happened in less than a month.
The flood of government stimulus and “do whatever it takes” approach from the Fed has been very successful to date, but it also had an unexpected effect:
“The major online brokers — Charles Schwab, TD Ameritrade, Etrade and Robinhood — saw new accounts grow as much as 170% in the first quarter, when stocks experienced the fastest bear market and the worst first quarter in history.
TD Ameritrade — which is set to be acquired by Schwab — said last month that retail clients opened a record 608,000 new funded accounts in the first quarter, with more than two-thirds of those opened in March. The e-broker’s new accounts proved to “skew younger” over the last quarter,” TD Ameritrade chief market strategist JJ Kinahan told CNBC.” Source
Rather than seeing risk, younger investors saw this as a generational buying opportunity. As such, you now have the S&P within 6 points of new record highs.
Conclusion
It’s easy to craft stories about why things have turned out as they have. With the benefit of hindsight, massive government stimulus seems like a perfectly plausible explanation for a rapid stock market recovery. However, at the time, most analysts were calling for a new Great Depression rather than record highs; the cries of a “classic bear market rally” are amusing in retrospect.
The recession and capital markets experience has been unlike any other in history; personally, I know that I have much to reconcile and learn from. Among all the things that 2020 is, it will likely (and here I am making a prediction) mark a turning point for policy.
For example, this recession was the first time that the government cut checks directly to the American people: it was wildly popular and successful. I expect stimulus checks to become a permanent feature of fiscal policy going forward. Furthermore, I believe there is increased pressure and support for such policy outside the context of economic contraction.
This has been a most unusual recession and the lessons and consequences will be the focus of economists, analysts and policy makers for years to come. If nothing else, you know this: don’t ever be fooled into thinking you’ve seen it all.
Until next time, thanks for reading!
-Aric Lux.
