Measuring Recovery In Real Time

A note from Charles Schwab talking all things recovery as we beginning to move forward and restore what the virus has impacted:

A lot has happened in the month following global stocks’ low on March 23, as represented by the MSCI All Country World Index. Nearly every major country seems to have put the peak in new COVID-19 cases behind them by several weeks and the discussion has now turned to the timing and staging of re-openings. Stocks have rebounded in anticipation of the end of the economic freeze and the timing of its restart.

There is still hard work to do. We need to answer key questions: What does the recovery look like? How fast is it? Does it lead to another shutdown? It isn’t enough for politicians to simply declare it is time to reopen—millions of individual workers and shoppers need to decide they feel safe enough to leave their homes.

Now, the key for the markets is assessing the pace and success of a recovery.

• If re-openings proceed steadily and new virus cases remain contained, stocks around the world may add to their gains over the past month.
• If people and businesses are slow to reengage, stocks could stall or head back down due to concerns about a muted economic recovery relative to expectations.
• If the re-openings are not careful and virus cases surge, necessitating another shutdown, stocks could head back to the lows in fear of a “W”-shaped economic outlook.

Real time

Over the coming weeks we will be closely watching how the re-openings are progressing in real time. Monthly and quarterly data points can later be used to validate the higher frequency daily and weekly indicators we believe market movements will be most closely tied to. As the re-openings having started in China and moved to Europe, our weekly dashboards charting the global economic recovery in real time will focus on China, the big three countries of Europe (Germany, France and Italy), and the United Kingdom.

Specifically, we will be looking at weekly data on six key elements of a recovery:

1. Rush hour commuting for how quickly people are returning to work.
2. Air pollution levels for manufacturing activity.
3. Retail foot traffic for how quickly people are returning to brick and mortar stores.
4. Weekend box office receipts for how quickly people are willing to come together in groups for entertainment.
5. Electricity use to capture the restart of service and manufacturing businesses.
6. New virus cases to see if the re-openings may lead to another shutdown.

Tracking every available weekly or daily data point may be misleading since many of them measure similar aspects of the economy. Instead, we selected these five to capture the most important signals for the market on how fast jobs, the economy and earnings may recover.

China

China was the first in and first out of the virus-driven economic shutdown. China’s shutdown took place at the start of the Chinese New Year on January 25 and lasted until about mid-March. The Oxford Government Stringency Index measures the extent of the shutdown policies, giving us an indication by country for how restrictive the shutdown was and how quickly it is being eased by policymakers. The shading in the dashboard reveals the degree to which that indicator has deteriorated or improved.

China real time dashboard as of 4/24/2020

Source: Charles Schwab, World Health Organization, Bloomberg, Box Office MoJo, Macrobond data as of 4/24/2020.

In the month since the shutdowns eased, we have seen a return to near normal levels of activity in some categories, like commuting to work, industrial activity (air pollution), and car sales (used in lieu of any weekly brick and mortar shopping data in China), while the rise in electricity demand has been slower and entertainment venues like movie theaters remain shut down. New virus cases have remained contained as activity has picked back up. China’s dashboard is encouraging, but may not be representative or sustainable. We will need to keep watching closely.

Europe

The first economy in Europe to announce a reopening was Austria. Austria began to reopen its economy two weeks ago on April 14. Other economies in Europe have since followed.

Austria very closely followed China’s pattern of new COVID-19, cases with a lag of 50 days, as you can see in the chart below. As a result, it isn’t surprising they are beginning to reopen. At this time, reopening has not been followed by a surge in virus cases in Austria. Perhaps improved hygiene and warmer temperatures may help avoid a resurgence, and a second-wave economic shutdown.

Austria following China’s new virus pattern 

*reopening began on April 14, 2020.
Source: Charles Schwab, World Health Organization data as of 4/27/2020.

There are early encouraging signs of economic restart in Europe. For example, rush hour traffic congestion in Austria’s capital city has recovered from 20% of normal during the lockdown to around 70% within days of the shutdown being lifted. But ,Austria is  small, so we look to the largest (and most economically important) countries of Germany, France, Italy and the U.K.to get a sense of the health for the world’s largest economy, the European Union. Hopefully, over the coming weeks these countries will track China’s recovery much in the same way they tracked COVID-19 infection rates.

Germany real time dashboard as of 4/24/2020

Source: Charles Schwab, World Health Organization, United Nations, Bloomberg data as of 4/24/2020.

Germany’s shutdown began around mid-March, and started reopening about a month later on April 20. Germany began to slowly lift restrictions on lockdown measures including the opening of smaller retail shops to be followed by schools on May 4. However, larger retailers and entertainment venues remain closed until August 31. So we may see some categories of activity begin to improve in the coming weeks.

France real time dashboard as of 4/24/2020

Source: Charles Schwab, World Health Organization, United Nations, Bloomberg data as of 4/24/2020.

France’s shutdown began in mid-March. On April 23, President Macron announced that an easing of the lockdown plan would be shared this week, which would include schools reopening on May 11.

Italy real time dashboard as of 4/24/2020

Source: Charles Schwab, World Health Organization, United Nations, Bloomberg data as of 4/24/2020.
No retail foot traffic data is available weekly for Italy.

Italy’s shutdown began in late February, earlier than its European peers. Italy has plans to reopen larger businesses and manufacturing in a phased process starting on May 4. Smaller stores have already begun to reopen in recent weeks, accompanying the two-thirds drop in the COVID-19 new case count.

United Kingdom real time dashboard as of 4/24/2020

Source: Charles Schwab, World Health Organization, United Nations, Bloomberg data as of 4/24/2020.
No electricity data is available weekly for the U.K.

The U.K.’s shutdown began on March 16 with a directive to avoid all non-essential contact. On March 20 bars and restaurants were closed. On March 24, a lockdown was put in place closing down most businesses. The lockdown for the U.K. was not as stringent as those in Italy or France, as indicated by the Oxford Government Stringency Index. Current restrictions are due to expire at the end of the first week of May, but could be extended in part or in whole. It is likely at least some will be extended, and monitoring economic activity remains important.

All in this together

The country-by-country dashboards aren’t necessarily intended to determine which countries are improving (or deteriorating) faster. They are intended to track an economic path that may establish a direction for stocks around the world. Stock market correlations, the degree to which stocks all tend to move up and down together as a group, have surged back to near the peak last seen during the financial crisis, as you can see in the chart below.

Stocks around the world moving in sync

Source: Charles Schwab, Macrobond, MSCI as of 4/27/2020.

With stock markets around the world moving in sync, tied to the real time prospects for a successful recovery in jobs, earnings, and the economy, the path that major Asian and European economies to end the economic shutdowns is important to investors everywhere.