Due to the spiking case counts, high unemployment rate, and expiration of stimulus programs in many parts of the country, it's difficult to be optimistic about the economic outlook. It's also startling to see the continued strength in the stock market. The Nasdaq (NASDAQ: QQQ) is making new highs, while the S&P 500 (NYSE: SPY) is on the verge of breaking out of its five-week range between 3,000 and 3,200.
This is despite the conversation shifting from reopening to potential, re-shutdowns. For the past three months, there have been week-by-week improvements in real-time economic data, however, this improvement may be stalling out. The numbers look good compared to last month but bleak when compared to last year.
Despite this mixed picture, it's worth noting some positive signals that are more meaningful than marginal improvements from a low base. And to be clear, coronavirus case counts continuing to increase would certainly trample these green shoots. In a way, it's like January and February of 2020, when there was some reason to expect an acceleration in growth given the low unemployment rate, wage strength, and signs that manufacturing was starting to pick up after being in a bear market since October 2018. An exogenous, negative shock overwhelmed those positive developments and that could happen again.
Green Shoots
Three leading indicators are signaling economic strength - lumber, copper, and FedEx (NYSE: FDX). Historically, strength in these sectors tends to correlate with an uptick in growth six months down the road.
Lumber prices tanked 45% during February and March. However, since bottoming, they are now up 90% and are now 10% above pre-coronavirus levels. Lumber is considered a leading indicator for housing. Housing is connected to so many different parts of the economy, and it's nearly impossible for the economy to go into recession if housing is in growth mode given its positive secondary effects on consumer spending, household balance sheets, and increased hiring and wages for blue-collar workers.
Another 'green shoot' is the strength in copper prices which is a leading indicator for manufacturing as it's an important component of so many different items. Copper prices fell by nearly 40% between January, when China began shutting down, and March, when it bottomed around 2.1. Since then, the metal has steadily risen and has now made new, year-to-date highs. The strength in copper is showing that industrial activity is once again strong, especially in China, where most of it is used. Of course, it's not too surprising considering that China largely has the virus under control and has rigorous protocols in place to ensure that any outbreaks are immediately contained.
The final positive development is FedEx earnings which were much higher than expected. The main catalyst was a surge in deliveries due to the pandemic. It's one indication that while the composition of spending has changed, the total amount may not be as negatively impacted as believed. It's simply creating a new set of winners and losers. FedEx's strength was somewhat surprising as it's no longer handling orders from Amazon (Nasdaq: AMZN). Even business deliveries were only 10% lower, while home deliveries were 72% higher.