Weekly Viewpoint: An Economic Checkup with headshot of Lindsey Bell

It’s time for an economic checkup.

Don’t worry. There are no needles involved. But we need to take some vitals: the consumer, housing, and businesses.

We are more than six months into the stock market rebound, and economic growth is clearly bouncing back after hitting rock bottom earlier this year. However, momentum may be slowing in some parts of the economy. With the timing of another comprehensive round of fiscal aid unclear, surgery may be required to determine if the V-shaped bounce will continue, a decline will begin, or if we’ll see a new normal of low growth.

The doctor will see you now.

Businesses’ Well-being

Take one look at the stock market and you’d probably guess that corporate America is doing just fine. Stocks are a few weeks removed from record highs, and market values for the S&P 500’s five biggest companies have risen 20% since before the pandemic.

The graph illustrates the average market cap change for S&P 500 companies by size since February. The top 100 largest companies have risen by 3.8%. The 101th-200th largest companies have declined by 3.9%. The 201th-300th largest companies have declined by 5.4%. The 301th-400th companies have declined by 6.7%. The bottom 100 companies have declined by 26.6%.

The swift move higher in the stock market since the March bottom was initially supported by asset purchases and other actions taken by the Federal Reserve. That helped some companies more than others. Take some market x-rays and you’ll see that more than half of S&P 500 businesses still haven’t fully recovered from February. Company earnings took a nosedive in the second quarter, and they aren’t expected to bounce back until next year.

Many of America’s smaller, private businesses who don’t have access to public market capital (the stock market or bond market) are barely surviving. While small business owners are generally feeling more optimistic now than they were in March, some companies are on the ropes. About 20% of small businesses don’t think they’ll be able to stay open for the next six months in the current economy, according to a National Federation of Independent Business survey last month. In July, a U.S. Chamber of Commerce survey found more than half of small businesses are worried about having to permanently close.

While we continue to worry about private companies as the pandemic continues to impact them in a more outsized way, we are just starting to see signs of life from small-cap public companies. The S&P Small Cap 600 Index has climbed 7.8% this month through October 8, better than the S&P 500’s 2.5% increase.

We will be watching to see if this is a sustainable trend.

Consumers’ Strength

It’s tough to have a strong economy without a strong consumer. The consumer has made up about 70% of economic output historically. Luckily, consumers are spending like COVID never happened. Retail sales have fully recovered after falling off a cliff in March, and consumer confidence is increasing at the fastest pace since 2003.

The graph illustrates retail sales (in billions) for the years 2010 through 2020. Since 2010, retail sales have steadily grown from $350 billion to over $500 billion in early 2020. The graph highlights the large dip from over $500 billion to $400 billion in March 2020, due to the COVID-19 Pandemic, as well as the subsequent bounce back to almost $550 billion.

Purchases of furniture, building materials, and sporting goods are back to pre-pandemic levels. However, the spending spree is uneven. The consumer isn’t spreading the wealth to all sectors. Sales of other items, like cars, clothing, and food, are just a fraction of what they were at the beginning of this year, as the pandemic shifted priorities.

To be sure, unemployment remains high and many temporary job losses are turning permanent. In September, job growth slowed for a fourth straight month (to a 661,000 increase). While still a big increase, at that rate, it’ll take 17 months to dig out of the 10.7-million job hole since COVID began.

With the pandemic lingering, it could take time for the job market to fully recover. The Federal Reserve recently projected that unemployment could stay above 5% through the end of next year.

Overall, most consumer data has been resilient thanks to fiscal aid padding people’s wallets. We’ll likely need to see some more fiscal stimulus for this strength to continue. For now, we’ll keep a close eye on key indicators mentioned here.

Housing’s Signals

Speaking of the consumer, we need to chat about a specific subset of American consumers: the homebuyers. The housing market barely skipped a beat during COVID, thanks to record low interest rates and an exodus from cities to suburbs. In fact, homebuying activity in America hit several milestones over the past few months. Existing home sales hit 6 million in August, a 13-year high. New home sales exceeded 1 million for the first time since 2006.

The graph illustrates the trends of existing home sales and building permits for the years 2010 through 2020. After a dip in March 2020 due to the COVID-19 Pandemic, existing home sales hit a 13-year high of 6 million, while new home sales hit a 14 year high of 1 million.

Clearly, homebuyers feel good enough about their finances and their future to make such a big financial decision. It’s been a bright spot during the pandemic. That is, unless you’re a coming-of-age millennial who could be priced out of your local market. Home prices continue to rise as housing inventory remains at low levels.

On the other hand, building permits and housing starts, two big tells for future housing activity, slowed in August. Mortgage delinquencies spiked in the second quarter, and forbearance periods are running out. As the summer selling season in housing passes, fall trends will signal whether the recent surge was only seasonal, or the start of something bigger.

The Prognosis

There’s some good news and some bad news. There’s no doubt the economy is growing, but early signs of weakness are surfacing.

To keep things on the path forward, our recommended treatment is more fiscal aid. The consumer can likely weather the storm for a little while longer, and there are other parts of the economy that are doing just fine. But the struggling small businesses, pandemic-prone sectors, and unemployed consumers need to be treated. Unfortunately, with Congress and the White House still in a stalemate, getting a stimulus deal soon feels unlikely.

Until then, we can’t give the patient a clean bill of health. And we may be in for some year-end economic struggles that could give the stock market some trouble.

Speech bubble icon next to text "Expert Take"


Headshot of Lindsey BellLindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.

Lindsey holds a passion for teaching individuals how to become successful long-term investors. She frequently shares her knowledge as a guest on national news outlets such as CNBC, CNN, Fox Business News, and Bloomberg News. She also serves on the board of Better Investing, a non-profit organization focused on investment education.