Investor Alert

Need to Know Archives | Email alerts

June 16, 2020, 9:35 a.m. EDT

A budding recovery could run into trouble after the election, warns Goldman Sachs

Critical information for the U.S. trading day

Watchlist Relevance

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    Dow Jones Industrial Average (DJIA)
  • X
    S&P 500 Index (SPX)
  • X
    NASDAQ Composite Index (COMP)

or Cancel Already have a watchlist? Log In

By Barbara Kollmeyer, MarketWatch

Getty Images
What happens if no one spends next year?

Stimulus in all shapes and sizes is spurring what looks like another day in the green for equities.

The Federal Reserve said on Monday it will start buying individual corporate bonds, adding to a program previously limited to bond exchange-traded funds. Reports that the administration of President Donald Trump is considering a nearly $1 trillion infrastructure splurge are providing an extra boost.

More help from central banks and governments adds credence to V-shaped — a sharp brutal decline followed by a strong bounce — recovery hopes, with Morgan Stanley among the backers of that outlook. And the economy remains a huge driver for stocks, which tanked when the Fed got super gloomy last week, and rallied earlier this month after some decent jobs news.

Our call of the day comes from Goldman Sachs economists, who say there is a worry on the horizon involving just how much spending power investors will have in the next two years. They zero in on disposable income growth, which is simply what households can spend and save after they pay taxes.

A team of economists, led by Jan Hatzius, estimates the U.S. had 25 million net job losses as of May, versus 9 million during the 2007-09 recession. For 2020, they see fiscal support via automatic stabilizers keeping incomes and consumption steady, turning what might have been a 3.4% drop in disposable income to full-year growth expected at around 4%.

That is the good news. The bad news is that they expect a 2.3% fall in disposable income for 2021. “Barring Congressional extension of fiscal support well into 2021 — or an even sharper normalization of the jobless rate than we or consensus expect — consumer spending could therefore pose a significant risk to the budding recovery in the quarters following the election,” said Hatzius.

The market

Reports of a coronavirus drug and better-than-expected retails sales are fueling a huge surge in the Dow /zigman2/quotes/210598065/realtime DJIA +0.66%  , S&P /zigman2/quotes/210599714/realtime SPX +0.74%   and Nasdaq /zigman2/quotes/210598365/realtime COMP +0.88%   in early action, while European stocks /zigman2/quotes/210599654/delayed XX:SXXP +0.89% are also in rally mode. Asia saw powerful gains, led by a 4.7% soar for the Nikkei /zigman2/quotes/210597971/delayed JP:NIK +0.09% .

The chart

Our chart from Bank of America Merrill Lynch’s May Fund Manager report shows how cash levels for institutional investors have dropped to 4.7% from 5.7%, which is the biggest monthly fall since August 2009:

Much attention is focused lately on the surge in mom-and-pop retail investors using the no-fee Robinhood app to pile into beaten-down stocks. Billionaire investor Leon Cooperman says that will end in tears, but then maybe for the big players too?

Also, those fund managers surveyed appear to have plenty of doubts about a V-shaped recovery:

US : Dow Jones Global
+229.23 +0.66%
Volume: 311.63M
May 7, 2021 5:15p
+30.98 +0.74%
Volume: 2.05B
May 7, 2021 5:15p
US : Nasdaq
+119.39 +0.88%
Volume: 3.97M
May 7, 2021 5:16p
+3.91 +0.89%
Volume: 0.00
May 7, 2021 11:03p
JP : Nikkei
+26.45 +0.09%
Volume: 0.00
May 7, 2021 3:15p
1 2
This Story has 0 Comments
Be the first to comment
More News In

Story Conversation

Commenting FAQs »

Partner Center

World News from MarketWatch

Link to MarketWatch's Slice.