Economy

10 Forces Driving the Stock Market Gains and the Economic Recovery

Jon C. Ogg

The U.S. Department of Commerce reported that U.S. housing starts for the month of April came in at just 891,000 on a seasonally adjusted annualized rate. That was a 30% drop from March and the slowest pace since February of 2015. New construction permits dropped 20.8% in April as well.

These were incredibly weak numbers, but the National Association of Home Builders has released a more current reading, covering the month of May, for current sales of new homes, sales of new homes expected over the next six months and the homebuyer traffic for new homes. The NAHB data had shown a ghastly drop of 40 points from March to April’s 30 reading, but the more current index for May was already back up to 37 and above expectations.

The Price of Oil Has Recovered

Another boost has come from the energy sector. China and other nations already were showing weak demand for oil early in 2020. As the United States and Europe were going into their own lockdowns, demand for gasoline and other energy products fell, while already committed production at previously hedged prices kept coming on to the markets. U.S. crude oil prices went so low that there were even negative futures contract prices for an instant, due to nuances in the market. Zoom forward a few weeks, and oil was back above $20 per barrel. Now, oil prices have even gone back above $30 per barrel.

The price of oil is a leading indicator of economic activity, and with the economy reopening and people driving again, it is believed that the worst is over there.

Small Businesses Have Been Funded

Small businesses more or less have received their government funding to keep employees on their payrolls. Since the launch of the Paycheck Protection Program on April 3, the Small Business Administration had processed over 3.8 million loans for more than $500 billion in total dollars in the first month. The latest, May 16, 2020, report showed that more than 4.34 million loans had been approved with a total of $513 billion funded.

It remains to be seen what happens after June 30, but efforts in Congress that have been supported by Treasury Secretary Steven Mnuchin could extend the June 30 deadline to use the PPP funds and to loosen the minimum 75% rule mandated for payrolls in order to qualify for loan forgiveness.

Can the Ongoing Risks and Uncertainty Be Overcome?

As with all downturns and recessions, the financial markets always get ahead of the actual recovery. The stock market bottomed on March 23, 2020, and while one can never say the lows cannot be tested again, the markets have recovered enough that some investors might say, “it’s not even a bear market anymore.” The nation has yet to see the second-quarter report on GDP that could show −25% or even −30% GDP, and the nation has not yet officially seen the 20% unemployment rate that is expected for May.

Corporate earnings also may have bottomed in the second quarter of 2020, with recoveries coming after the summer. There is also a continued risk that as the economy reopens there will be large spikes in the number of COVID-19 cases, and that could force businesses to close back up or it could spook consumers from wanting to go out.