July was a very strong month for nearly all assets, including stocks. The S&P 500 rose 5% as interest rates continued to decline and the US dollar had its weakest month since 2010. Lower rates and a lower dollar should be positives for the economy going forward by stimulating investment and bolstering US exporters. A steady surge in new US daily COVID-19 cases slowed and began to decline in July without the intense lockdowns experienced in March-April.
Despite the positive developments there are still some risks of the economic recovery hitting a stall. Many states and municipalities have paused and/or partially rolled back reopenings. The $600 weekly unemployment supplement ended on July 31, 2020 while Congress continues to debate a new stimulus measure as of the time of this writing. The impacts of the supplement’s expiration on consumer spending habits, and jobs numbers will be important to follow. According to a University of Chicago study, 68% of those receiving the additional $600 weekly benefit were making more than they were when working.
US consumers tightened their belts in the midst of the pandemic. The personal savings rate is the highest on record as shown in the chart below. Credit card debt has declined over 10%, or $100B, with credit card delinquencies down as well. Homeowners have taken advantage of lower interest rates by refinancing existing mortgages. Meanwhile, June data showed consumer spending made up about 2/3 of the ground lost since the beginning of the pandemic. Much of the remaining ground is attributable to soft consumer spending on services while spending on goods is back near pre-pandemic levels. Services includes relatively more COVID sensitive industries like air travel. High savings and near normal spending on goods show many consumers have the ability and willingness to spend when their health is not at risk. The mix of higher savings/lower debt service costs has and will likely continue to provide a tailwind to consumers who feel confident about their employment situation.
-Jared J. Ruxer, MS