Schwab Market Perspective: Is the Worst Behind Us?

U.S. stocks and economy: Climbing out of contraction

The deepest point of economic contraction looks to be behind us, as U.S. gross domestic product (GDP) growth fell at a quarter-over-quarter annualized -32.9% rate in the second quarter. Estimates for third-quarter growth are pointing to a double-digit gain, but they’ve come down of late, as a midsummer resurgence in the virus and subsequent re-closings of some areas of the economy have halted activity.

Even though certain high-frequency data—such as TSA traveler throughput, initial jobless claims, and OpenTable seated diners—haven’t improved markedly, the threat of the virus has started to recede. In relative terms from the spike in late July, new COVID-19 cases, hospitalizations, and the positivity rate have trended down, as you can see in the chart below.

The virus’ trajectory in the United States is improving

Source: Charles Schwab, COVID Tracking Project, as of 8/11/2020.

We’ve continued to affirm that much of the economic recovery is dependent on the virus—both its trajectory as well as progress on a vaccine or other therapeutic remedies. Yet despite a slowdown in the spread, some state and local governments have already halted or reversed their reopening plans, while businesses and consumers continue to decide how soon to reopen and how much to go out, respectively—all substantial risks to the recovery.

Fortunately, even staggered reopening efforts across the country have brought back a considerable number of jobs. The July nonfarm payrolls report from the Bureau of Labor Statistics showed an impressive gain of 1.76 million jobs—which beat the estimate of 1.48 million—and a decrease in the unemployment rate from 11.1% in June to 10.2% in July. Notably, as you can see in the chart below, some of the hardest-hit sectors during the depths of the crisis gained the most.

July’s increase in nonfarm payrolls favored the hardest-hit sectors

Source: Charles Schwab, Bureau of Labor Statistics (BLS), as of 7/31/2020.

The jobs report isn’t without caveats, the first being the slowdown in the pace of gains. Even though monthly changes have made the recovery look like a “V,” the level of payrolls is still nearly 13 million below the pre-pandemic peak. Hours worked fell in July, and there are still nearly 31 million individuals collecting some form of weekly unemployment insurance. Given the gap between less-rosy higher-frequency data (such as initial jobless claims) and the BLS report, future gains in the labor market may be more muted.