Key Takeaways
– S&P Success Despite COVID-19. Stocks posted the best quarterly returns since Q4 1998, despite a fairly flat June.
– June brought renewed bouts of volatility as US coronavirus data took a turn for the worse.
– Outside of coronavirus, economic data was generally better than expected in June.
– The risks of renewed shutdowns will be a headwind to markets, but a major correction is not necessarily in the offing.
Coronavirus has and will continue to be the driving force for the economy and market.
The news has turned decidedly negative on the coronavirus front. 37 states saw rising cases in the last full week of June. Florida, Idaho and Louisiana saw a doubling of new cases. The rise in new cases has been particularly concentrated in younger people. This is a positive for hospitalization and mortality rates, but can be dangerous from a transmission standpoint, as asymptomatic infections are more common in younger people. We believe there would be serious reluctance to reimpose shutdowns and in our opinion, they will only happen if hospitals capacity nears exhaustion. Despite the bad data, the demographics of the newly infected, at least at this point, mean that hospitals are not likely to be as strained as they were during the peak of the outbreak in New York.
Despite a lackluster June, the S&P had its best quarter since 1998.
S&P Success Despite COVID-19
The market responded to the surge in new cases with a modest pull back. June saw the most volatile days in the market since March. However, for the month, the S&P was mostly flat and Q2 2020 saw the best quarterly returns since 1998. Economic data was better than expectations. And provided at least some justification for the strong rally that we have seen in equities. Highlighted by a very encouraging retail sales report that saw a 17.7% rise in sales month-over-month. April job numbers came in considerably higher that expectations. With the economy adding 3 million jobs, versus expectations of losing 5 million. However, this was likely some measurement error that will lead to revisions in the future.
The Citi Surprise Index, which measures how well economic data has come in relative to expectations, hit an all-time high in June. Home and auto sales rebounded strongly, which is further indication that the stimulus had a quick and positive effect. Initial jobless claims have flattened out, but at a very high level. The trend tends to be more important that the level for markets, but these are exceptionally high levels.
Where do we go from here?
We think that June’s action will be the norm for some time, that is volatile but mostly flat. There are mounting downside risks to the economic recovery from surging coronavirus cases and a withdrawal of fiscal stimulus from the likely expiration of extra unemployment benefits. There is some bipartisan support for another round of stimulus, but we are not holding our breath with the election approaching. Looking at the upside, any positive news on the vaccine or treatment front would likely propel markets higher and economic momentum is good. Overall, while we certainly see the presence of the ingredients of a pullback, we do think it will be avoided and markets will grind higher as the wave subsides. We are definitely less optimistic about the near-term prospects (1-3 months) of the market than we have been, but the longer-term outlook remains relatively positive.
What should I do?
At Adams Wealth we believe in investing for the long term, but not in “set it and forget it” portfolios. We are actively monitoring developments in the market and economy and will adjust portfolios accordingly. As always, we are happy to answer any questions you may have or review your portfolios and financial plan.
To learn more about the writer of this article, Cormac Murphy, CFA, visit: https://adamswealth.stealthmedia.com/team/cormac-murphy/
Or connect with him on LinkedIn: https://www.linkedin.com/in/cormac-murphy-cfa-33897914/.
Disclosure:
Adams Wealth Management is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.