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America Is 50% Reopened -- What it Means For Stocks

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Whether or not a winter wave of virus infections is coming, the U.S. economy is about half reopened, according to consumer and tech stock analysts at Goldman Sachs. That’s a positive for stocks, but what this all means for the market in the near-term is a bit trickier.

Goldman’s reopening scale, which uses statistics that track personal mobility and at-home behaviors to put a one-to-ten score on the level to which the country is reopened, showed a reading of 5 Wednesday. That’s up from a score of 4 last week. "In week 19 of the Measuring the Reopening of America series we shift from a 4 to a 5 after several weeks of little to no improvement as lodging, retail and box office all show meaningful progress over Labor Day Weekend even as video conferencing, eCommerce and online payments continue to reaccelerate in the Stay Home category,” the team of analysts wrote in their note. Also of note, indoor dining will start in New York City September 30, with restaurants operating at 25% capacity.

"Back to normal” activities, which also include dining and air travel activity were at roughly 75% of their February 3 levels in the past week. Last week, activity was at closer to 60% of previous levels. The low was 20% at the end of March. The trend has clearly been up, but with some choppiness during the summer.

None of these trends are an incredible surprise to investors, especially as companies report second-quarter earnings that are beating estimates. Lululemon  (LULU) - Get Lululemon Athletica Inc (LULU) Report said on its earnings report Tuesday afternoon that 97% of its stores are opened and are operating at 75% capacity.

Yes, most of the S&P 500 has reported and the year-over-year earnings decline was closer to 30%, against initial forecasts of 45%. But consumer companies with strong digital strategies, like Lulu, are faring the best. Lulu is up 120% since its late March low (squashing the S&P 500), even though it fell 9% Wednesday after management said marketing spend will eat significantly into near-term profits and the stock’s multiple has expanded aggressively. In dining, Starbucks  (SBUX) - Get Starbucks Corporation Report and McDonalds  (MCD) - Get McDonald's Corporation (MCD) Report, both with superior digital offerings and brand value, are up 21% since June 26, beating the S&P 500’s gain of 13.5%. Restaurant Brands International  (QSR) - Get Restaurant Brands International Inc Report, which has seen explosive digital sales growth, only saw 8% of its Burger King revenue come from digital in the second quarter. The stock is up just 5.5% since June 26. Starbucks, by contrast, saw 22% of total transactions in the second quarter come from its mobile app, according to comments on the company’s earnings call.

Still, the reopening trends can indirectly lift stocks. It’s hard for investors to quantify the economic and earnings impact of small businesses opening, especially on a day-to-day basis. But when small businesses re-hire employees, employment data can surprise to the upside — and it has of late. Consumer spending can do the same. This would all point to the recovery into 2021 on pace to give way to a level of corporate earnings close to that seen in 2019.

One potential headwind is the stalled fiscal stimulus bill. With waning political will among members of Congress to spend trillions of dollars, if businesses open up too soon, Congress may be encouraged to maintain its position that it won’t spend as much as it did earlier in the year. The latest reports say the Republican senate bill in its current form, would be roughly $500 billion. Unemployment benefits, which served as a huge boon to consumer spend over the summer, will be halved from the last round. There will be no checks to households. Small businesses would see another round of low interest, forgivable loans from the small business administration. But this may not be enough stimulus, especially as interest rates are close to rock bottom and corporations have already shored up liquidity with trillions of dollars of new borrowings completed in May and June.

Also, the reopenings could -- like in May this year -- be coming too soon since a third wave of infections potentially looms, and a vaccine likely won’t hit the market until at least December.

The good news is that consumer discretionary stocks, and other value-oriented cyclicals, trade at tolerable valuations compared to the low interest rates, so downside may be somewhat limited.

The point: the go-forward picture is murky, and the reopening data must be taken with a grain of salt.

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