It Was the Best of Times and the Worst of Times
October 21, 2020
This year will surely go down in the history books as one of the most puzzling in terms of reconciling much of the economic data with various trends that are difficult to justify given the challenging overall environment that so many people are facing. This has created two very different realities for many Americans. The COVID-19 pandemic and its resulting financial impact has touched everyone, but the substantial offsetting moves to support the economy with both monetary and fiscal stimulus have caused many improbable outcomes. This can be seen in the housing market, and personal income statistics, as well as small business data and even the stock market as a whole. For those who have been fortunate enough to retain their job but see economic hardship around them, it is natural to wonder if the next shoe is about to drop. In our view, these two rather divergent realities will likely meet somewhere in the middle as the economy continues to recover and as we continue to learn how to better manage the evolving disease state; but this will take more time.
Perhaps the most stark and curious contrast in prevailing trends is in the housing market. In April of this year, the U.S. economy lost 20 million jobs causing the unemployment rate to spike to almost 15%.* Not surprisingly, many homeowners stopped making mortgage payments as the risk of losing earned income rose. With help from the CARES Act, foreclosures of federally-backed mortgages were temporarily paused for six months, and in May, approximately 8% of homeowners missed their monthly mortgage payment.** This became somewhat reminiscent of the housing crisis of 2008—even though most homeowners this time around have considerable equity in their home—unlike back then when many were underwater with loans that exceeded the value of their property. Given this backdrop, sales of existing homes fell almost 18% in May as many parts of the economy simply froze. Just one month later, though, the housing market took an unexpected turn for the better as home sales rose more than 20% with all regions of the country participating in the recovery. This improvement continued throughout the summer months and, according to the National Association of Realtors, the median price for an existing home in August was up an eye-opening 11.4% from the prior year.
This housing strength is being driven, in large part, by those who are able to work from home. Indeed, many people now find themselves longing for more space, and a dedicated home office. The icing on the cake is that interest rates are at all-time lows. Plus, many companies are allowing employees to spend much more time working remotely, which means that living with an arduous commute is less of a factor in where one chooses to live. Meanwhile, by September, the number of homeowners in pandemic-related forbearance—pausing their mortgage payments—had declined by over 20% from its May peak*** and, as the economy recovers, we would expect to see continued improvement.
Another surprising positive development that probably helped reduce the number of mortgages in forbearance is that personal income rose 12% in April,**** reaching an all-time high. This has never occurred during an economic recession and compares to typically less than 1% growth. This increase was driven entirely by government stimulus in the form of one-time government payments as well as the $600 per week supplement to unemployment that was provided through July. Many consumers cautiously saved this additional income which caused the savings rate to briefly rise to more than 30%.***** This recent improved savings appears to be helping to bridge the gap in any further support that has not been forthcoming as prolonged negotiations in Congress have delayed another expected round of stimulus.
This delay has contributed to the pain that many consumer-facing small businesses have been feeling and it is heartbreaking to see so many restaurants and retailers struggling during this time. Interestingly, though, recent applications for new businesses have risen exponentially and are up over 40% year-over-year, according to the Census Bureau. In our view, this speaks to the inherent American resilience despite the many challenges this year. Even though many existing small businesses may not be able to stay solvent until an effective vaccine or therapy is broadly available, there could be a wave of new, hopeful small businesses that may ultimately support new job creation for this important sector of the economy.
Finally, this year’s dramatic market developments underscore the stock market’s general forward-looking nature. Following the fastest market correction in history, the stock market nonetheless began to quickly rebound and ended the third quarter up more than 5% year-to-date. As stunning as this kind of market recovery seems to be given the still difficult economic and health-related environment, it is in our view being driven by a strong combination of historically low interest rates, a technology sector that is experiencing a renaissance and which now comprises almost 40% of the S&P 500, and trillions of dollars in stimulus that has meaningfully supported U.S. households. For these reasons, and even though there is still a significant amount of economic healing that needs to happen, we do not expect that the market will revisit its March lows even if faced with a resurgence in the disease state.
Looking forward, we expect more sectors of the economy to come back to life although they are admittedly dependent upon a viable vaccine or therapy. In the meantime, another round of economic stimulus will be necessary as well, but it may be too late to save many consumer-facing businesses that have already closed or pared back to operational levels that are not sustainable. The current froth in some parts of the economy—especially housing—will also probably cool a little bit, while areas that have been unduly harmed so far will begin to heal. The eventual result could be a return to an environment that feels more normal and where economic data and trends are less a tale of two cities, so to speak, and instead are felt more broadly.
* – According to the Bureau of Labor Statistics (BLS)
** – According to Black Knight, a mortgage data company
*** – According to the Mortgage Bankers Association
**** – According to the U.S. Bureau of Economic Analysis (BEA)
***** – According to the U.S. Bureau of Economic Analysis (BEA)
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