COVID-19 Market Update: Interpreting the Rebounding Retail Sales in the US

Equities ended the week higher with the TSX gaining 1.5%, the S&P up 1.9%, and EAFE up 1.9% recovering part of the previous week’s decline. The Nasdaq Index came close to the all-time high of June 10. During the week, leadership rotated to energy stocks with crude oil gaining 9.1% on indications that major oil exporters were honoring previously agreed-to production cuts and increasing demand with the reopening of economic activity. Healthcare and material stocks also benefited from the reopening with pent up demand. Healthcare demand came from medical procedures postponed because of the COVID outbreak driving hospital visits. Materials demand came in the form of home projects, including home office construction as many are expected to transition from downtown to home office work environments.

The US Fed announced it would begin buying a diversified US corporate bond portfolio. In testimony before Congress, Chairman Powell suggested additional fiscal measures helped reverse the shaky start to the week. Improving economic news supported the market until the last hours of Friday when optimism faded with news of Apple closing stores again in four states where COVID cases climbed. Using the data dated June 20 from Worldometers, the number of deaths from COVID in Florida, one of the new “hotspots,” is one of the lowest to date with only 147 deaths per million or on a percentage basis .015% – hardly pandemic numbers. The Texas numbers are even less at 46 deaths per million. News concerning COVID illustrates just how hyper-sensitive the market is when not that long ago, bad news was ignored.

On Tuesday, the US Commerce Department reported a 17.7% increase in May retails sales, one of the highest on record, doubling the consensus expectations and sparking discussions about a “V” recovery. In Canada, retail sales are reported one month behind the US; however, the April number as expected was a significant decline, resulting in a negative 26%. With the US’s strength, it is anticipated that the May number for Canada is likely to be strong, suggesting to some observers that the worse data is confined to March and April. It is important to remember that consumer spending makes up 60% of the Canadian GDP and 70% of the GDP in the US. After a rebounding month or two, the retail sales numbers may start to slow. New US jobless claims continue to shrink, but they are still quite elevated at 1.58 million for the past week, down from the peak in March (6.9 million). As the reopening takes hold, unemployment will gradually come down, and some estimate the unemployment rate will be near 10% (plus or minus) by year-end.

Many market observers have mentioned possibilities of a market pullback based on historical evidence, valuations, and over-inflated expectations for earnings growth after the resumption of economic activity. The most optimistic observers think the market may end the year higher than it started and will continue to move higher as we enter 2021 and 2022, based on the Fed’s low-interest-rate stance along with stimulus programs and fiscal stimulus. Below is an interesting chart from Edward Jones using data from Bloomberg suggesting we may not retest the previous lows of early this year. Notice in the column entitled “Return 12 Months After Recovering 90%,” returns were appreciably higher. However, in the column to the right, pullbacks during the ensuing 12 months show anything but a steady performance.  Whether we test the previous lows or not, there is little doubt that we will see increasing volatility in the months and years ahead, unlike what we have seen in the last decade. Our world has forever changed, and we must adapt to the uncertainty that lies ahead.


Peak # of Days to Recover 90% of Decline Return 12 Months After Recovering 90% Largest Pullback During That 12-Month Period
2020 71 ? -7.1%
2007 1129 13.2% -9.1%
2000 1656 12.4% -9.4%
1987 416 15.2% -10.2%
1980 468 40.4% -7.1%
1973 1665 22.6% -17.1%
1968 551 10.7% -11.0%
1961 279 21.6% -6.5%
1956 469 31.8% -4.4%
Source: Bloomberg, Edward Jones calculations, S&P 500 index total return and trading days. Past performance is not a guarantee of future results.



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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

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