More of the Same

May 15, 2020

Markets drifted lower but remained in their weeks long trading level of 2700-2900 as investors expressed heightened nervousness that the economy’s reopening could spark a second wave of infections. Data from South Korea, China, and other Asian countries – countries who had substantially arrested their initial outbreak – showed outbreaks and hot spots emerging as they have sought to find a balance between commerce and containment. Federal Reserve Chairman Jerome Powell also fanned concerns with his comments made to the Peterson Institute in which he noted the U.S. economy faces substantial downside risks and potentially needs more stimulus to combat the economic downturn. His comments come on the heels of retail sales, inflation, and industrial production – all of which posted notable declines. For the week, the S&P 500 fell -2.26%.

Retail Sales Data Shatters Records

U.S. retail sales plunged a record -16.4% in April, well below estimates for a -12.3% decline. April’s decline follows March’s 8.3% drop which had already set a record for data going back to 1992. Declines were most notable for clothing stores, restaurants, and service stations. Clothing stores had a particularly rough month as many storefronts were shuttered, leading to a -78.8% drop in sales. Bars and restaurants didn’t fare much better as they registered a -29.5% drop in receipts as they too were largely closed. Service stations also posted a notable -28.8% drop in sales as consumers drove less largely due to many states instituting statewide stay at home orders. On a positive note, non-store retailers like Amazon registered an 8.4% increase in sales. That was the second largest increase since 1982. With many retailers opening their doors once again, the worst for consumer spending is likely behind us.

Consumer and Producer Prices Fall

Consumer prices fell -0.8% in April, their largest decline since the last recession as the pandemic disrupted demand for energy, travel, clothing, and other goods and services. Excluding volatile food and energy, core prices fell -0.4% for their largest monthly drop in records dating to 1957. Overall, consumer prices were up +0.3% from year ago levels while core prices were up +1.4% in the same period. Producer prices also fell in April, down -1.3%. Year-over-year, prices were down -1.2% in April which was their biggest decline since November 2015. Despite the month’s price declines, it still appears that we are in a disinflationary and not deflationary environment with many economists believing the price declines will begin to stabilize soon.

Industrial Production Collapses

With economic activity at a virtual standstill in April, industrial production fell a record -11.2%. Capacity utilization also fell to a record low of 64.9%. However, April’s figures did manage to beat estimates of a -12% decline in production and capacity utilization of 63.2%. Manufacturing output also posted a record drop of -13.7% as production of cars, trucks, and auto parts fell more than 70%. Although factory activity is expected to resume in May, it may prove difficult for production to quickly bounce back due to continued supply chain disruptions, particularly in the auto sector. The sector is highly dependent on Mexico which continues to grapple with the pandemic and is critical for automotive parts. Disruptions such as these are likely to ripple to U.S. factories even if the latter are fully operational.

No grand epiphanies were revealed this week. It briefly looked as if the market might spook and retreat to levels we’d find more attractive, but the S&P 500’s 2800 keeps providing support. It’s hard to tell if that support is really attributable to a vote of confidence in the actual prospects for the economy or if it is simply a bet that the Fed is providing investors with a put on risk. Either way you look at it, the downside has proven surprisingly stubborn while valuations have capped the upside in recent weeks.

The Week Ahead

Memorial Day weekend has arrived. In observance, we will be responsibly socially distancing from Week in Review. Our next edition will return on May 29th with figures on new home sales and durable goods orders.

The Science of Being Human

A host of research published this year underscores the conviction that humans are fundamentally good, which has been a widely debated topic since the dawn of time. The good versus evil human conundrum has been studied, debated, and argued over by philosophers, psychologists, artists, writers, professors, historians, and others. The pendulum appears to be swinging in our favor. Below are some recent science-backed insights that remind us of the wonderful things about our species, human nature, and the world in which we live.

Humans are altruistic

In February 2020, researchers at the University of Washington published a study of 19-month-olds that showed that the infants would “repeatedly and spontaneously” give food to others without verbal cues and also when the children were hungry themselves and the food was highly desirable (grapes, bananas, blueberries, etc.). The research demonstrated altruistic and cooperative behavior that is unique to the human species. You can read more about the research here or the scientific paper here.

We crave social connections

We have an evolutionary drive to connect with others. Science writer and author of a book published in January 2020 titled Friendship: The Evolution, Biology, and Extraordinary Power of Life’s Fundamental Bond explores the science of human connection. Author Lydia Denworth writes that our friendships are as vital to our lives and health as diet and exercise and have a scientifically-proven positive impact on our well-being. The Mayo Clinic writes here that “adults with strong social support have a reduced risk of many significant health problems, including depression, high blood pressure and an unhealthy body mass index (BMI). Studies have even found that older adults with a rich social life are likely to live longer than their peers with fewer connections.”

Humans have an instinct to cooperate, not compete

Over the past week, the world has been fascinated by the historical recounting of a story of six teens who were stranded on an island in the South Pacific in 1965. It’s been called the real “Lord of the Flies” although it turned out much differently than William Golding’s novel. Instead of fighting and falling into chaos, the teens, ages 13 to 16, shared resources and cared for one another, demonstrating a high degree of cooperation and communal spirit. They set up a schedule of duties to cultivate food, stand guard, care for chickens, and more. They even tended a signal fire so the flame never went out, for more than a year, until their rescue in 1966 by a fishing captain. In real life, solidarity trumped self-interest.

An article published a few weeks ago in Psychology Today observed that when confronted with uncertainty or crises, humans are even more inclined to come together to help one another, to share, to give, to show kindness, to volunteer, and to perform heroic acts. The world around us might be changing in unexpected ways, but the science shows we act, well, quite human, which is a wonderful thing to be.