After a historically fast decline in equity markets, the recovery has been just as historic.
At the end of July, the S&P 500 index was less than 4% away from reaching the all-time high set in wFebruary. Fixed-income markets followed the same pattern: a steep decline followed by a strong recovery.
The overall economy, on the other hand, has not been quite as fortunate. U.S. GDP declined in the second quarter by an annualized rate of nearly 40%. Unemployment skyrocketed from historic lows to just over 16% as businesses closed their doors and sent workers home to shelter-in-place.
It appears the worst of the economic decline is behind us:
• Unemployment has steadily declined from the April high to 10.2% at the end of July, not great, but an improvement.
• Manufacturing has been expanding for three straight months, both here and around the world.
• The service sector has been resilient, with the sector’s PMI — Purchasing Managers Index — reaching 67.1 at the end of July (any measure over 50 is expansionary).
• Consumer spending has recovered, rising 8.6% in May and 5.6% in June.
• Retail sales are rising, but at a slower rate: The Wall Street Journal reported a 1.2% increase in July from June, after a dramatic 8.4% increase the previous month.
• Small business sentiment and consumer sentiment have improved.
The Federal Reserve and central banks around the globe plan to keep rates low for the next few years. Also, U.S. and EU bond-purchasing programs will continue to support liquidity in fixed-income markets.
This monetary support is a catalyst for investors to venture into risk assets. In fact, the riskier segments of the equity and fixed-income markets have led the rebound.
The government has acted to support the economy as well, releasing trillions of dollars to aid small businesses and consumers. This stimulus has helped keep the economy from sliding into a free fall.
The hope of additional stimulus has acted as buoy for the markets the past few weeks. Investors are watching to see the extent of the stimulus, including size and length of time.
As of mid-August, however, negotiators remained far apart on a new deal, and Congress left town until after Labor Day without an agreement.
Indeed, the political and geopolitical landscape has been anything but market friendly. The U.S. forced the closure of a Chinese consulate in Houston under suspicion of spying.
The Chinese retaliated by closing a U.S. consulate in Chengdu. Multiple Chinese tech firms have come under fire, amid national security concerns, both in the U.S. and Europe.
An approaching U.S. presidential election holds the potential to affect markets, as well. Despite these issues, the market and investors continue to move forward almost unfazed.
The X-factor in the current environment is COVID-19. The past few months have been a roller coaster of headlines.
News of increased infection rates and additional hotspots has led to market declines and more volatility. Conversely, positive headlines about potential vaccines or treatments affected not just the companies involved, but the entire market.
In terms of the market and economic recovery, it seems like the worst and best are probably both behind us. The second quarter’s cataclysmic decline hit bottom on March 23. But the fantastic returns the market experienced after that have slowed, and they likely can’t be sustained in the current economic and geopolitical climate.
Still, none of this means we’ll have smooth sailing as the economy returns to “normal.” We may experience a series of bumps as we move through the process of reopening the economy in this unprecedented environment.
What does all this mean for investors? Well, there is an adage that states, “The best diet is the one you stick to.” When it comes to investing, we believe the same idea is true. We feel that selecting the appropriate portfolio — which you can stick with no matter what happens — is the best way to reach your financial goals. If you’d like to discuss your portfolio, please contact your Advisor.