U.S. equity markets staged a relief rally as stocks bounced back after Wednesday's drubbing. While the rally lost some steam into the close, gains held up for Big Tech companies as investors were hoping for good news from their latest quarter's earnings reports. They mostly got that, but October has taken its toll on several sectors that were hoping for a broader recovery. 

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The Q3 preliminary GDP report delivered on that note as the U.S. economy grew at a seasonally adjusted 33.1%, according to the Commerce Department, which was better than expected. But there are weaknesses in that report that could be a harbinger of harder times ahead (more below).

Still, the 2020 stock market rally bears a strong resemblance to 2009 with strong gains followed by a few hiccups. The circumstances are very different this time around and the resurgence of the virus has complicated everything. But we can't ignore the patterns because sometimes they do repeat.

U.S. GDP Roars Back, But Weaknesses are Showing

U.S. GDP for the third quarter roared back at a better-than-expected 33.1% on a seasonally and inflation-adjusted basis, up from the 31.4% drop in the second quarter. Still, U.S. GDP remains about 5% lower than it was at the beginning of 2020, so the recovery is far from complete. U.S. consumers led the way out of the second-quarter hole as personal consumption expenditures charged higher at a record pace as households spent more on cars, electronics, furniture, and other goods.

Spending on services increased, but not nearly enough to recoup losses from the pandemic. Those are the businesses that require close contact like travel, dining, and entertainment.

The drop in revenue in the services part of the economy is staggering:

  • Health care: down 6% or $131 billion
  • Restaurants/Hotels: down 19% or $165 billion
  • Transportation: down 23% or $104 billion
  • Recreation: down 32% or $160 billion

Personal Income

Personal income and personal savings, which had both been very strong in the summer thanks to those stimulus checks, showed signs of cracking in the third quarter. According to the Commerce Department:

  • Current-dollar personal income decreased $540.6 billion in the third quarter, in contrast to an increase of $1.45 trillion in the second quarter. 
  • Disposable personal income decreased $636.7 billion, or 13.2%, in the third quarter, in contrast to an increase of $1.60 trillion, or 44.3%, in the second quarter.
  • Real disposable personal income decreased 16.3%, in contrast to an increase of 46.6%.
  • Personal savings was $2.78 trillion in the third quarter, compared with $4.71 trillion in the second quarter.
  • The personal savings rate — personal savings as a percentage of disposable personal income — was 15.8% in the third quarter, compared with 25.7% in the second quarter.

Saving, Just Less

People are still saving, just less. It's worse on the lower end of the income spectrum where data shows that households earning less than $50,000 were tapping into their savings and taking on loans in late August and September as those stimulus checks stopped coming. 

The problem becomes even more acute as layoffs continue. The Labor Department reported that 751,000 people filed for first-time unemployment claims last week, and more than 20 million people are receiving some form of unemployment insurance.

2009 SPX same as 2020 SPX?

Have We Seen this Before?

2020 has been unique in all kinds of ways, but the pattern of the stock market's recovery since the lows of March is eerily similar to the recovery of 2009. The recessions were brought about for different reasons, of course, but the swiftness of the response by the government and the Federal Reserve was similar, although much bigger in 2020.

But just like in 2009, the S&P 500 in 2020 staged a strong rally from the market lows, then corrected seven months into that rally before charging higher.

As we've said before, volatility and uncertainty make investors over-sell and over-buy on the way up and down, but eventually markets revert to the mean. Let's see if that holds true this year.