The Week Ahead – Algebra: Solving for W

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

The word algebra comes from the Arabic word al-jabr, meaning “reunion of broken parts.” At its core, algebra is the study of mathematical symbols and the rules for manipulating those symbols. We all remember the quadratic equation from our high school and college studies: ax2 + bx + c = 0.  In fact, history has shown that quadratic equations were being solved as early as 2000 BC by Babylonian mathematicians. While not quite algebra, investors are constantly taking in information on variables and figuring out the potential outcomes.

More recently, as attention has shifted from forecasting economic destruction (yes, 2Q20 GDP will be bad) to an economic rebuild, investors have been struggling with “W.” Early on, “W” stood for wave, as in the first wave of COVID-19 slashing through the world and laying waste to the global economy as governments combated it with lockdown. As economies have begun reopening and rebuilding their economies, the question for all now is does the newest “W” variable stand for wave or wind? A second wave would further deepen the global recession with a high possibility of another round of lockdowns. This would destroy any of the green shoots in the economy that we’ve seen the past few weeks. For example, the national occupancy rate for hotels plunged to a low of just 21% in the week ended April 11, but has since slowly climbed back steadily, reaching 32.4% in the week ended May 16. In contrast, if “W” turns into wind for the proverbial economic sails, strong roots will be established for a sustainable economic recovery beginning in the latter half of the year. As we solve for and define “W” over the next few weeks, we will then be able to better solve for “time,” as in how long before we’re 25% back to normal, to 50% back to normal, and to 100% back to normal.

Markets have calmed significantly since the Federal Reserve and federal government announced and began implementing their monetary and fiscal policies. In the month of March, investors saw the S&P 500 whipsawed to a manner never seen before. Out of twenty-two possible trading days, an astounding eighteen of them traded at plus-or-minus 2%.  That’s a hit rate of 82%. In April, we continued to see excess volatility as the S&P 500 traded ten out of twenty-one trading days at the plus-or-minus 2% rate, a 48% hit rate. With only a week left in May, we’ve only seen three days so far. Intra-day volatility has continued, however, with trading sessions opening up high and closing flat or down and vice versa. This is part of the normal healing process for markets.

In the week ahead investors will get another look at U.S. GDP for the first quarter of 2020. Expectations are for the number to decrease further from the initial -4.8% to -5.0% annualized as more of the trailing data from the end of March is accounted for. Housing data will be prevalent this week as typically on a combined basis, residential investment (construction of new single-family, multi-family structures, residential remodeling, production of manufactured homes, and brokers’ fees) and consumption spending on housing services (gross rents and utilities paid by renters, as well as owners' imputed rents and utility payments) account for ~15-18% of GDP. In the early weeks of the market sell-off, investors became more alarmed across all real estate sectors, dealing a large negative shock to the housing market. Home purchases are a large indicator of consumer confidence –and, unlike in 2008, the housing market is the victim of the economic recession and not the culprit.

Data deck for May 23–May 29