2020 Midyear Review: Positive Movements in the Markets Contrast the Economic Effects of COVID-19 [Plus the Economic Indicators Providing Hope]

July 6, 2020

After a very volatile first quarter for the global equity markets, there has been a noticeable change in sentiment over the last three months. The sharp drop from February 20th through March 23rd—one of the fastest declines in market history—was followed by an equally impressive rebound from March 24th through April 17th. Since then, things have settled down, and stocks have moved gradually higher. The economic news has continued to be poor, but it is improving. The unemployment rate had increased to 14% but is now back down around 11%, as many workers who had recently filed unemployment benefits have been re-hired.

With many businesses shut down during April and May and then gradually re-opening in June, the second quarter Gross Domestic Product (GDP) will likely be down significantly more than 25% on an annualized basis. While this number will create extremely negative headlines, it will not be a surprise for the markets, as it has been widely discussed and has already been factored into stock prices.

The U.S. Government Still Has Its Work Cut Out For It…

As we have mentioned in past market and economic updates, there are three factors that are impactful: policy response, virus concerns and economic recovery. The policy response has been strong but must continue for the foreseeable future. While the actions of the Federal Reserve (lowering interest rates and providing liquidity for the capital markets) and Congress (passing the CARES Act) have been bold, there is more work to do, and it is likely we’ll see another stimulus package in the next month or two. It is also well known that the President wants to implement an infrastructure program. Not only is our infrastructure in need of improvement, but this allocation would also put many people back to work at a time when unemployment is high and interest rates to borrow are extremely low. Of course, this additional government spending would add to the already astronomical budget deficit for this year.

The Current State of COVID-19

As we all know, the COVID-19 pandemic has been relentless. The desperate search for a vaccine to prevent contraction, as well as therapeutics to better manage the symptoms of those who are sick, has put the spotlight on some of the best medical research companies in several countries. While the healthcare community is optimistic we will have better tools to deal with this virus within the next 12 months, currently in the U.S., new cases are spiking in “hot spot” states. Additionally, while the daily death count has gone down significantly, there are still worries about hospitals’ capacity to deal with the recent spike in new cases. There is also some fear of a second wave of the virus in the Fall. This pandemic is, therefore, not going away yet.

Some Positive Economic Indicators Provide Hope

While the pandemic is still among us, there are some economic indicators providing a little optimism. First, an appropriate analogy to how the economy has fared the past several months might be that it took an elevator to the ground floor while the country was shut down March–May, and now it’s taking the stairs to get back to where it was pre-COVID. In other words, it will take some time, and there will be setbacks, but also reasons for hope.

Most economists believe the recession began in February and ended in May, making it one of the sharpest economic downturns in the shortest amount of time. The good news is we expect a bounce-back in economic data during the third quarter, which just began on July 1st. The wheels were set in motion in late May and into June, as weekly statistics on things like airline travel, hotel occupancy, gasoline purchases and credit card charges began to show meaningful improvement, albeit from very low levels. Employment data, while somewhat mixed, is also indicating the worst may be behind us. Consumer spending appears to be picking up, as well as manufacturing activity and general sentiment.

Second Quarter Market Performance

In terms of market performance, the second quarter results were very impressive across the board. U.S. large company stocks (S&P 500) and mid-cap stocks (Russell Mid Cap) appreciated by 20.5% and 24.6%, respectively, while the Russell 2000 Small Cap index was the top performer at +25.4%. International stocks in the developed markets of Europe and Japan (MSCI EAFE index) also shined, returning 14.9%, but not quite keeping up with the 18.1% gain in the MSCI Emerging Markets benchmark. The bond market turned in a respectable 2.9% return, based on the Barclay’s Aggregate index.

Continue to Focus on Your Long-Term Financial Goals

Looking forward, the second half of the year is sure to keep investors on the edge of their seats. The market will rally on good news related to vaccine progress and will decline if cases and/or deaths move significantly higher. Improvement or disappointment in the economic recovery will also cause volatility. Add US–China friction and the build-up to the November elections, and it’s unlikely the next six months will be boring. In closing, we want to reinforce that short-term market volatility can be unnerving but has little impact on long-term financial goals. In the last 20 years, we’ve been through the September 11th attack and the worst financial crisis since the Great Depression, and yet we’ve gotten through those downturns and have been stronger on the other side. When we look back in five years, the same should be true for 2020: a year we will never forget.