Market & Economic Update – July 2020
By: Partner and Sr. Wealth Advisor, Peter Mueller
Global markets, and specifically US companies, rebounded strongly from the market low on March 23rd supported by massive monetary stimulus by the Federal Reserve, fiscal stimulus by Congress with the $2.2 trillion CARES Act, and the gradual re-opening of our economy. The US stock market continues to outperform developed foreign and emerging markets with leadership by the mega capitalization technology companies. These businesses (i.e. Alphabet, Amazon, Apple, Facebook, Microsoft, etc.) operate in the cloud and benefit from the accelerating trend of the digitization of our economy and daily life. These trends were in place prior to Covid but have accelerated because of the virus and will continue to accelerate in a post-pandemic world.
While it’s great to see asset prices recover despite the pandemic continuing to spread, it’s also very counter intuitive as we entered a deep recession in February resulting from Covid and the economic shutdown. The disconnect between the stock market’s rise and the damage in the real economy (high unemployment, business closures, political uncertainty, and virus spread) seem staggering. What is important to remember is that financial markets are in the business of discounting, or anticipating, the future. As a result, they generally lead economic cycles and are currently pricing in an economic and profit recovery in 2021 – not focused on the damage today in 2020.
The decline in the markets in late February and March represented an adjustment to the new reality of viral spread in the US and the world coupled with the shutdown of the US economy – as we all stayed at home and practiced social distancing. During March, markets declined enough to “price in” the known and potential negative outcomes. The swift and massive monetary stimulus by the Federal Reserve (the Fed’s balance sheet increased from $4.2 trillion pre-Covid in February to $7.0 trillion as of July) and the $2.2 trillion CARES Act provided the catalysts to shift the trend of the market toward recovery. The story of the recovery and economic re-opening is still being written as the unemployment rate stands at 11% and we are seeing a surge in Covid infection rates in many regions of the country. While the rate of economic growth off the bottom of activity in March and April has been strong, it is worth noting that the rate of growth will invariably slow over coming quarters. We anticipate that the economy and markets will continue to recover, but the recovery will look less like a “V” and more like a Nike “Swoosh.” Given the unprecedented shock that the economy has suffered this year, we are more than happy with a swoosh!
We anticipate that the rate of recovery over the coming months will vary. The optimism of re-opening and increased economic activity is being challenged by increasing infection/hospitalization rates that not only take a huge human toll, but also threaten the economic recovery as some regions may need to shutter business activity to slow virus spread. That being said, for the long-term investor, the importance of being in the market outweighs trying to time the market. Low interest rates (US 10 Year Treasury = 0.65%), low inflation (below the 2% Federal Reserve target level), and the tidal wave of money that the Federal Reserve and Congress are pumping into the markets and economy will continue to support and fuel asset prices.
We will continue to stay vigilant by investing in high quality businesses with strong balance sheets, leaders in their respective markets, and shareholder friendly managements. These businesses are growing stronger during this crisis by gaining market share at the expense of weaker competitors and fortifying their balance sheets. We are hopeful that with time the pandemic will end, and life will begin to resemble the normalcy that we are all accustomed to. Human nature being what it is, pre-Covid trends and habits will come back – with time.
We appreciate your continued confidence and support, and as always, please contact your advisory team if you have any questions or wish to discuss.
Your HoyleCohen Team