Recently, we have been noting how strong investment markets have been performing, led by cyclical, economically sensitive areas. This is occurring at a time when COVID-19 related data (cases, positivity rates, hospitalizations, and deaths) in the U.S. are at or near the highest levels since the pandemic started, which is prompting policy makers to implement more restrictions (and citizens self-selecting not to engage in public gatherings). This will most likely have a negative impact on economic data that is going to be released for the months of November and December.
There was early evidence of this in the PMI data for November and the November payroll report. The absolute level of the Manufacturing and Non-Manufacturing PMI readings is still above the 50 expansion/positive sentiment level, but the rate of change is slowing, as are some of the underlying components.
The ISM Manufacturing PMI declined from 59 in October to 57.5 in November. Business Production, New Orders, Employment, and Inventories also declined during the month, but only Employment was below 50. The forward-looking Business Backlog increased to 57, the highest level in over a year.
The ISM Non-Manufacturing PMI declined from 56.6 in October to 55.9 in November. Business Activity, New Orders, Business Inventories, and Business Backlog also declined during the month, but only Business Inventories was below 50. Employment increased during the month to 51.5.
The November payroll report continued to show positive absolute growth but also had a slowing rate of change. A large portion of the improvement in the payroll data since May has been a recovery in the areas most impacted by the lockdowns (retail, restaurants, leisure, and hospitality) as they suffered the largest losses. They are also the areas being most negatively impacted by the renewed restrictions and reductions in customers willingness to gather in public indoor venues. This has caused the pace of payroll recovery to slow for these industries.
These trends will likely continue until COVID-19 related data starts to improve in the U.S. (the recent reinstatement of restrictions in Europe has led to improved COVID-19 related data). This will have a negative impact on economic and labor market data linked to services and public gatherings.
Investors (by way of market prices) continue to remain focused on the expectation for a recovery in economic activity and corporate earnings. Unless the COVID-19 related data continues to accelerate well into 2021 or the news around the efficacy or availability of a vaccine changes, this trend of weakening near term economic data and improving market activity will likely continue.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC