We’ve been closely monitoring the details in our Road to Recovery Playbook over the past few weeks, looking for ways to opportunistically take advantage of the sharp pullback in equity prices. The Playbook consists of five factors we are scrutinizing in order to gauge progress toward the market’s bottoming process and to signal an appropriate time to get more aggressive with equity allocations. One of those factors emphasizes whether we believe there is visibility into the probability and severity of a US recession. We believe a review of the IHS Markit Flash U.S. Composite PMI™ for March 2020 provided useful insights related to that Playbook factor.
As shown in the chart below, the IHS Markit Flash U.S. Composite PMI fell sharply over the past couple of months. The data had consistently been registering above 50 (typically the dividing line between expansion and contraction) for the past few years. As COVID-19 began to disrupt the US economy in February 2020, the measure, which covers both manufacturing and services, dipped to just under 50. As COVID-19 began to spread rapidly in certain regions of the United States, the statistic reached an all-time series low of 40.5. Importantly, we believe that type of slowdown was already expected.
“We believe that recession in the United States is already the expectation of most investors at this point, given the historic pullback we’ve witnessed in equities over the past month,” said LPL Financial Managing Director and Chief Investment Officer Burt White. “The S&P 500 Index recently declined about 35% from its all-time high, which is similar to the average pullbacks we’ve seen historically in bear markets and recessionary environments, leading us to believe stocks could carve out a bottom and trend higher from here, even if incoming economic data indicates we are currently in a recession.”
The IHS Markit Flash U.S. Composite PMI was released the morning of March 24. Despite an all-time low for the statistic, the S&P 500 rallied nearly 10% for the day, as investors increasingly believed Congress would approve a massive fiscal stimulus package. We believe that the fiscal and monetary authorities in the US have taken aggressive, stimulative actions in anticipation of weakening economic data.
Thursday’s record jobless claims put more pressure on policymakers to act. While investors seem to have priced in a recession in the US with near certainty, we believe equities could rebound if the growth in COVID-19 cases in the US begins to ease, paving the way for stimulus measures to boost economic growth potential in the second half of 2020.
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