Market Observations May 2020 Recap

Economic divergence has been a trend and key theme for years now and has been particularly acute since the start of the Covid-19 Pandemic. Divergence has been on display within the equity market across sectors and between growth and value factors. While the technology sector has outpaced all sectors over the last 12 months, there is a particularly wide chasm between the technology and energy sectors, as technology has outperformed energy by over 67%.

The performance of growth stocks compared to value stocks is similarly stark in comparison, as growth has outperformed value to a degree not experienced since the tech bubble, approximately 28% over the last 12 months.

The credit markets are also exhibiting substantially differing outcomes, which have been caused and/or accelerated by the impact of the pandemic. Within two weeks of Hertz filing for bankruptcy, Amazon borrowed $10bn at a record low rate of 0.4%. The pandemic’s impacts on these businesses’ revenues are at extremes.

Households have not been immune from the Covid-19 Pandemic’s divergence theme. A significant portion of the record 33% savings rate, which normally would have been spent on restaurants, vacations and consumer goods, found its way to the equity market, as the rebound continued with a 4.8% gain in May. Individuals with the ability to work from home largely drove the record savings rate while also participating in the equity market’s appreciation, increasing the divergence of fortunes with those unable to work remotely.

As the commercial reopening expands, initial economic analysis and business media coverage will likely focus on consumer confidence, pent up demand and retail sales before taking a wonkish dive into money supply and the velocity of money. Given consumer spending accounts for approximately 70% of US GDP growth, investors, as well as the Fed, will be anticipating and analyzing these metrics even more closely than normal to gauge the pace of the rebound. The strength and breadth of the consumer lead rebound will likely determine the inflation-deflation debate, currently one of the most polarizing topics in investing.

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