Morgan Stanley
  • Thoughts on the Market
  • Jun 25, 2020

Reopening at the Tipping Point

With Ellen Zentner and Michael Wilson

How should investors think about the recovery as the U.S. balances reopening with concerns over a second wave of coronavirus infections?

In this addition to the Thoughts on the Market series, Chief U.S. Economist Ellen Zentner translates the sometimes complex world of economics, helping investors identify early indicators of market-moving trends. 

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Episode Transcript

Mike Wilson: Welcome to Thoughts in the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley.

Ellen Zentner: And I'm Ellen Zentner, Chief U.S. Economist for Morgan Stanley Research. On this special edition of the podcast, we'll be talking about the consumer, pent up demand, and how might this cycle be different. It's Friday, May 22nd at 10:00 a.m. in New York.

Mike Wilson: Hey, Ellen. I'm curious how you think about this recession. It's been so steep and yet we're seeing some pretty good activity already from the consumer and some of the credit card data. How do you explain that, that snapback? And I guess secondarily, you know, how do you think about the stimulus that is going to probably start to taper out around July when the unemployment benefits start to fade? And how should we think about the consumer once that happens?

Ellen Zentner: So, yeah, the downturn was so sharp. You know, we've seen now to date around 40 million folks file for a jobless claim. And so when you've got so much job loss, how is it that consumers are spending it all? Well, we've got a lot of government support that came through in the first CARES Act, providing those unemployment benefits that importantly also included the $600 weekly supplemental.. And of course, that goes very far to putting food on the table and to providing an offset to that lost income. So what we've seen is consumer spending has declined sharply, but not nearly as much as we would have seen if we did not get that support.

Ellen Zentner: The good news there is that we are getting more spending. Our public policy strategists are expecting a "CARES 2.0," if you will, to include an extension of several important programs. And that's important because it buys us more time to get the unemployment rate down more, bring more folks back to the labor market, and lessen the need for those benefits.

Mike Wilson: You know, the other part of a recession is there's always pent up demand. And clearly, we have some of that this time. Where do we think pent up demand will snap back the most? And how long does that typically last?

Ellen Zentner: You know, we say this is a demand shock and not your typical cyclical downturn. But there are many ways in which this will act like a typical cyclical downturn. Think of folks that were on the cusp of renewing a lease or wanting to buy a motor vehicle going into this, and they've now put it off. Well, that's a lot of pent up demand that builds during that two month time and those sales come through. And that's something that Adam Jonas, our motor vehicle analyst, certainly is seeing. And that tends to be an area that pent up demand shows up first and foremost, those high dollar durable goods items of the economy.

Ellen Zentner: On top of that. I should have mentioned the rebate checks that households got. That was spent, a good deal of it, within about nine days of getting it. But it also sent the savings rate sky high because it shifted a lot of spending toward food and nondurable household goods, where normally those rebate checks would go toward appliances, motor vehicles, those big ticket items. So, there's tremendous scope for pulling down the savings rate here based on what's left over from those rebate checks for people to go out and spend as well.

Mike Wilson: So that probably leads us to my last question. Obviously, it's a global pandemic and that was a pretty sudden trigger, but that means that the recovery will probably be unique as well and the next expansion will be unique. How do you think about the next expansion?

Ellen Zentner: Yeah, I think one thing that I like to point out, that is unique, if I focused just on the household side here, going into this downturn that's where balance sheets weren't stretched. Unlike in 2008. In fact, households' balance sheets in the aggregate were healthy. So that's a key difference in this cycle where you don't have that added weight on households. And so it's really just a factor of getting past the virus where we could see an inflection in growth. You know, whether that's spring of next year, if Matthew Harrison is right and that's when we get a widely available vaccine. But I can tell you that we're going to see at least a return to some activity before that, some level of activity, because there is a chunk of the population that says, "I don't need to see a vaccine. I just need to see that counts are going down. I just need to feel more comfortable that we've got the hospital capacity to treat me if I do get sick." It might be touch and go here depending on the virus news and developments of the vaccine and how households feel about that. But certainly when a vaccine becomes broadly available, you could see an inflection at that time, which means, you know, sluggish recovery compared with the norm until vaccine and then something that's well beyond faster than previous cycles.

Ellen Zentner: So, Mike, you know, how does that jive with your market view? I mean, how would you think about this cycle versus past cycles and how this one could be different?

Mike Wilson: What's interesting about, you know, markets is they tend to be very efficient in discounting events kind of before they happen. But it's remarkable how efficient, you know, we kind of discounted the full recession in about a month's time. Back in March, we had basically a market crash and the market made a V bottom, which I think is foreshadowing, which you expect to be, somewhat of a V-shaped recovery. But as I think about what you said, this is more likely to be a consumer cyclical led recovery, whereas, you know, sometimes it's led by capital spending. And we're trying to position our portfolios to take advantage of that consumer cyclical kind of recovery initially.

Mike Wilson: Secondarily, because of the amount of stimulus that's coming in and as you said, it's going to probably continue for the foreseeable future. We may actually begin to get some inflation, I mean not right away, but in the outer years and the markets will start to discount that, too. And that means securities that are levered to higher inflation could start to do better as well. And a lot of those securities have been out of favor for the last 10 years because we've been in somewhat of a disinflationary environment. So those are some of the things that we're thinking about and how we're trying to position portfolios and advise clients. And I think, you know, like any cycle, Ellen, we got to be flexible and we got to change our views as things change. But for now, that's how we're seeing it.

Mike Wilson: Ellen, thanks for taking the time to chat today.

Ellen Zentner: Thanks, Mike.

Mike Wilson: Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts App. It helps more people to find the show.