Top Weekly Themes
- More stimulus. Last week, Congress passed a $484 billion interim coronavirus relief bill, which is expected to be followed by a second aid package that may rival the size of the $2.2 trillion CARES Act passed in March. The ultimate size of COVID-19 related stimulus is unknown, but it will most certainly be a staggering sum, dwarfing the stimulus provided during the Financial Crisis. Importantly for many private sector companies, over $1 trillion in loan guarantees will help offset balance sheet losses. Putting the long-term moral hazard discussion of “bailouts” aside, the balance sheet destruction will be smaller than it should be given the magnitude of the economic damage. Therefore, once things “re-open,” the economy may recover somewhat faster than it did following the 2008-09 recession.
- How will we pay for it? More debt. On the surface, this is terrifying because the reality is that we will never pay it off. The obvious follow-up question is then, what are the consequences? The good news is, we have seen this movie before. During World War II, the U.S. budget deficit hit a record 30% of Gross Domestic Product (GDP). As is the case today, people were concerned. In 1946, the Council of Economic Advisors warned President Truman that the national debt would destroy any economic progress, leading to another depression. As we now know, this did not happen. By the 1980s federal debt-to-GDP was at its lowest level in 50 years, and the war was effectively “paid for.” No, the debt was not actually paid off; old debt was retired with new debt. Federal debt has increased each year since 1950. What happened was that the economy grew faster than the debt, so debt-to-GDP continued to fall even while running annual deficits.
- Not all borrowers are created equal. In this case, we are not talking about credit quality; we are talking about the difference between countries and individuals. As opposed to individuals, countries have indefinite lives, so they can remain indebted indefinitely. The bottom line is that if nominal GDP grows faster than the annual budget shortfall, debt-to-GDP falls, leaving a lower debt burden. The amount of debt is far less important to a country than is the sustainability of the debt burden. For example, federal interest payments as a percent of GDP are little changed since the 1940s, and far lower than the 1980s and 1990s. There is certainly no guarantee that we can again grow out of our debt. Will interest rates stay low? How much debt will be added in the coming years? In truth, we don’t know but remembering that the debt burden could fall even as debt rises is an important, and certainly unintuitive, observation.
 BCA Research
 Housel, Morgan. “Who Pays for This?”. April 17, 2020.
|Week (%)||YTD (%)||1-Year (%)||3-Year (%)||5-Year (%)||Div Yield (%)|
|Russell 1000 Value||0.8||(21.9)||(14.1)||0.9||14.9||3.16|
|Russell 1000 Growth||(0.4)||(5.5)||6.4||51.4||75.8||1.18|
|Bloomberg/Barc US Aggregate||0.0||4.9||11.3||16.1||19.9||1.40|
|Bloomberg/Barc US High Yield||(1.2)||(9.2)||(4.4)||5.9||17.8||8.27|
|Bloomberg/Barc Muni Bond||(0.8)||(0.9)||3.6||10.8||16.8||2.07|
|Bloomberg/Barc Global Agg. Ex U.S.||(0.1)||(2.1)||2.6||7.6||11.0||0.94|
|Crude Oil (WTI) ($/bbl)||(17.0)||(73.0)||(75.1)||(66.7)||(71.4)||16.5|
|Natural Gas ($/mmbtu)||15.2||(11.3)||(20.9)||(37.4)||(23.3)||1.9|
|1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
As of April 23, 2020 (close)
*Dividend Yield For MSCI EAFE and MSCI EM are from 3/31/2020.
Charts of the Week
A Familiar Battle Ground
- The S&P 500 struggled at a familiar price level last week.
- 2,800 – 2,900 on the S&P 500 has served as a battleground for the bulls and bears over the past few years. This price level was formidable resistance from early 2018 to mid-2019, then served as a floor before the market ran higher into early 2020.
- We find it noteworthy that stocks have again lost momentum at this level. The markets path in the coming days/weeks may be very telling in terms of the recent rally’s strength.
What does the stock market know that we don’t about the economy? Typically, nothing.
Before COVID-19 rendered 2020 market outlooks useless, we talked a lot about leading economic indicators. There are many: Manufacturing Purchasing Managers’ Index (PMI), consumer confidence, small business confidence, and housing. Each of these metrics gives a glimpse into the future of overall economic growth. The problem for investors is that the stock market moves coincidently with leading economic indicators. Leading economic indicators do not help predict the stock market and, more importantly for this note, the stock market does not help predict leading economic indicators. With economic data still cratering, but the S&P 500 up over 25% from the lows, many are starting to believe that the stock market knows something we don’t about the economy. So, does it?
Our view is no, it does not. As evidenced in the charts below, stocks trade alongside leading economic indicators; they do not anticipate them with any consistent lead. Cornerstone Macro Research (CSM) created a composite leading economic indicator that includes four variables:
- Manufacturing: PMIs (a 50/50 blend of the ISM and EM PMIs);
- Housing: The NAHB Index – the earliest and most important of LEIs in their opinion;
- Consumer: Consumer Confidence – a catch-all for employment, income and asset sentiment;
- Small Business: The NFIB Index – something that focuses on the “little guy.”
As seen in the charts below, during every other market bottom going back to 2009, the CSM composite leading index bottomed in the same month that stocks did. Have leading economic indicators bottomed? Perhaps, but we believe the odds are they have not.
Stocks moving swiftly higher would be inconsistent with a continued decline in the CSM leading index. One can never know for sure, but we found this data compelling.
 Cornerstone Macro Research