After weeks of ignoring growing coronavirus risks, markets finally awoke to the reality that a second surge is taking hold across the globe. Europe, having avoided the worst of the first wave in March, is now approaching death rates approximating those in the U.S., prompting some countries to enact stricter social distancing measures to contain the outbreak. France announced a strict 30-day lockdown which calls for people to stay home and for nonessential businesses to close. Meanwhile, Germany announced a more limited shutdown with nonessential businesses such as restaurants, bars, gyms, and shops ordered closed, starting Nov. 2 and lasting through month-end. The stricter measures announced in Europe spooked investors who fear Europe’s lockdown may foretell a similar fate for the U.S. just as the economy appeared to be regaining its footing. This week, the Commerce department released a stellar Q3 GDP report which showed the U.S. economy grew at a 33.1% annualized pace from July to September. Personal spending figures from September were also strong, notching their fifth consecutive monthly increase. These numbers meant little to markets given the pandemic’s resurgence and the uncertainty over the election just a few days away. For the week, the S&P 500 fell -5.64% while closing out October by declining nearly -2.00% – its worst monthly performance since March.
U.S. GDP Rebounds in Q3
The U.S. economy staged a sharp rebound in Q3 as GDP rose at an annualized rate of 33.10%. A surge in business and residential investment, along with strong consumer activity, helped the economy reverse its -31.4% plunge in the second quarter. All things considered; the rebound is incredibly impressive. GDP now stands just -3.50% below year-end 2019. A decline of -3.5% in GDP in any other context other than a pandemic is considerable, but the fact is that demand remains significantly constrained due to social distancing behavior and to have gained back so much ground is certainly notable. Breaking the annualized number down to a quarterly rate, Q3 GDP grew 7.40%, which helped offset Q2’s record -9.0% decline. Investors, for the most part, shrugged off the news for the reasons noted above, but also due to the increasing chance that Washington may not be able to get a stimulus deal done until perhaps as late as 2021.
Spending Up for Fifth Straight Month
Consumers boosted their spending 1.40% in September. That was the fifth straight month of increases, driven by higher pay and remaining pandemic aid. Personal income, which measures what households receive from wages and salaries, government aid and investments, rose 0.90%. The rise reflected an increase in employee compensation and the federal supplement to state unemployment benefits that provides recipients an extra $300/week. With more money in their pockets, consumers boosted their spending on a broad basket of goods and services including autos, clothing, healthcare, fitness and entertainment. The spending figures continue to show that consumers are remaining resilient despite the months-long pandemic.
This week’s selloff comes as no surprise and frankly in many respects, it was welcomed. The data this week shows that the economy is entirely capable of snapping back once the path is cleared, and while we get the fact that every lockdown runs the risk that we continue to dig a deeper hole, we also remain steadfast in the belief that considerable demand will be released once the pandemic abates. Whether that happens by mid-2021 or late 2021 is somewhat academic when you talk about it from a long-term investing point of view. The point is that it will happen, and we will use volatility like we saw this week to build positions thinking about a post-pandemic world.