Situation Desk: May 5, 2020
Situation Desk: May 5, 2020

Situation Desk: May 5, 2020



William M. Giffin
William M. Giffin
Chief Executive Officer
Executive Board Member

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Kevin Rice
Kevin Rice
Senior Investment Strategist
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Situation Desk: May 5, 2020

From the Situation Desk – Market Update from TC Wealth Partners


On March 23, the S&P 500 hit its lowest point since December 2016, down 34% from its all-time high on February 18. Since that time, it has retraced 27% of that loss. The rally occurred during a global pandemic that brought a sudden stop to our economy along with dire economic forecasts and massive record unemployment. The rise in investor optimism and the stock market rally can be attributed to confidence in the monetary and fiscal stimulus, pharmaceutical breakthroughs, several foreign economies successfully opening, large metropolitan areas showing slower infection and mortality rates, and plans to reopen the U.S. economy.


Current valuations of companies in the S&P 500 seem to have underestimated the threat of a deep decline in corporate earnings, the impact of high unemployment and the economic damage triggered by the pandemic. We believe that stocks are pricing in an orderly and successful economic reopening, which leaves ample room for near-term disappointment. While we have never seen this kind of liquidity injected into our economic system, historically stocks generally do not go up during periods of declining earnings.


To date, the bulk of companies reporting first-quarter results have either reduced their earnings guidance for the year or withdrawn it entirely due to uncertainty around the impact of the global shutdown associated with the virus. Markets have looked past 2020 earnings and are starting to focus on 2021, where there is more optimism that May’s start of a gradual return to more normal economic activity, combined with federal stimulus and extremely low interest rates, can help support earnings growth once the recovery takes root. We expect this year’s earnings uncertainty will keep volatility elevated, but with lower market swings than experienced during the March sell-off.


New economic data released last week provided a preview of the magnitude of the economic toll associated with the coronavirus pandemic. The U.S. economy contracted at an annualized rate of 4.8%, in the first three months of the year, the largest economic contraction since 2008. With stay-at-home orders put in place in mid-March in many places around the country, and just beginning to ease in May, we think that the second quarter of the year will bear more of the brunt of the pandemic-induced shutdown. According to the Congressional Budget Office (CBO), second-quarter GDP is forecast to contract nearly 40%, annualized, in the three months from April to June.


May marks a pivotal turning point from lockdown to an incremental reopening. We think the pace of the reopening will depend on local health conditions and the durability of downward trends in infection rates. It will also depend on the behavioral changes that people and businesses make as they reorient themselves to resuming economic activity during an ongoing (though receding) pandemic. As new economic data continue to reveal the full brunt of the pandemic impact, it is important for investors to keep a long-term investment perspective. While the storm clouds have not cleared in the economy, we think monetary and fiscal stimulus are planting seeds for an eventual recovery in economic and corporate fundamentals that will help stocks over the longer term.


Tags:  Consumer Confidence, Coronavirus, Corporate Earnings, COVID-19, Disciplined Investing, Economic Outlook, Federal Reserve, Global Supply Chain, Letter from the CEO, Market Performance , Market Update, May 2020, Situation Desk, Volatility

Note:  The content of this article is for guidance and information purposes only and is not intended to be construed as advice. Information provided is not intended to provide investment, tax, or legal advice.