Situation Desk: June 9, 2020
Situation Desk: June 9, 2020

Situation Desk: June 9, 2020

 

By:

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: June 9, 2020

From the Situation Desk – Market Update from TC Wealth Partners

The Clouded Path Between Crisis and Recovery

The month of May marked the transition from a national April lockdown to a gradual reopening of the domestic and global economy. Markets have continued to rally with the reopening due to optimism around an economic recovery later this year as well as promising news of rapid progress on a COVID-19 vaccine. Since March 23 the S&P has had its fastest 50-day rally in the history of the index and as of this week is in positive territory. Despite the market rallying, the economy has not had the same experience. In this market update we will try to provide some reasons why we believe the stock market is rallying in this economy.

The Market Is Not the Economy

The stock market is forward-looking and economic data is backward-looking. The sell-off of the S&P in February and March reflected uncertainty around the growing pandemic and anticipation of a resulting recession, but during the market pullback, economic readings were still displaying healthy pre-virus labor-market conditions. Now, stocks have rallied at expectations that have leaped forward to the reopening of the economy and a rebound in GDP and corporate profits.

While new economic reports will show historic unemployment rates and declines in consumer and business spending during the second quarter, we expect the market to reflect expectations for the second half of the year and into 2021 and be more responsive to indicators related to COVID-19 treatments as well as progress on reopening the economy. At the same time, we think the market is pricing in a somewhat smooth reopening of the economy, meaning evidence of setbacks or slower progress pose potential risks in the near term.

At this stage, we think the market has priced in the severe downturn in GDP and accompanying temporary spike to historically high unemployment levels. That said, we don’t think a prolonged recession extending well into the second half of the year is fully priced into the market. We don’t think that is the most likely outcome. However, we’re watching for a renewed flare-up in new COVID-19 cases, evidence of a slower-than-hoped return of economic activity, and/or lasting damage to the labor market as potential instigators of market volatility.

Federal Reserve Stimulus

Since March, the Federal Reserve has purchased a staggering $3 trillion in bonds to support credit markets, slashed short-term interest rates to zero, and has pledged to buy specified quantities of investment-grade corporate debt and high-yield exchange-traded funds. This has been paired with a large fiscal response, including the expansion of unemployment benefits, direct money transfers, and loans to small businesses. These unprecedented measures have helped prop up stock prices by boosting market liquidity, lowering the cost of borrowing, and providing financing to corporations.

By providing liquidity to the market, the Fed has increased investors’ confidence that they can access credit. Also, by buying corporate debt, the Fed has bailed out businesses that may have struggled to survive. Lowering interest rates to near zero has also been positive for markets; lower rates increase the present value of future earnings that investors would accrue. Taken all together, we believe that the Fed’s actions have increased investor confidence and supported stock prices. With the current bond yields so low, it is difficult to turn away from stocks.

Individual Investors

Individual investors have been a rising force during this stock rebound.

Contrary to old-school theories that individual investors bail at times of market crisis, new investors have piled into brokerage accounts this year, lured by free trading, lack of pro sports-betting and casinos, more time to watch the markets, and government stimulus checks.

In recent months, U.S. brokerage firms have seen a flood of new retail accounts. Charles Schwab saw a 58% increase in new accounts year over year, while TD Ameritrade and E*TRADE saw 149% and 169% jumps, respectively. They have also seen an increase in trading in new accounts with Charles Schwab recording 27 of the 30 highest volume days in their history during the first quarter.

Priced to Perfection

Despite all the liquidity that has been injected into the system, it may not be enough to keep businesses afloat and decrease unemployment if things turn out worse than expected. We believe the economy is still in the early stages of its recovery and the stock market has priced in a perfect resolution to the COVID-19 pandemic. We expect the path between the strength of the equity rally and the current economic weakness to remain clouded, and that is why we expect more market volatility in the future.

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Tags:  Consumer Confidence, Coronavirus, Corporate Earnings, COVID-19, Disciplined Investing, Economic Outlook, Federal Reserve, Global Supply Chain, Individual Investors, June 2020, Letter from the CEO, Market vs. Economy, Market Performance , Market Update, Market Volatility, Situation Desk, Stimulus, 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.