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Stocks declined modestly last week, while long-term bond yields retreated near record lows. The S&P 500 turned briefly positive for 2020 before pulling back on concerns over escalating Chinese/American tensions. On the economic front, U.S. initial jobless claims increased last week for the first time since March, raising worries that the economic recovery is beginning to stall. Positively, European Union leaders agreed on a landmark stimulus package to help member states mitigate the economic downturn. We believe the pace of improvement in economic data will likely slow as coronavirus cases continue to rise, but the continuing fiscal and monetary stimulus will play a crucial role in supporting the expansion until a vaccine is discovered.
Last week Major League Baseball opened its 2020 season, with the New York Yankees and the Washington Nationals playing the first game in Washington, D.C. This opening day for baseball mirrored the challenges of reopening for municipalities across the globe, with delayed start dates, extended safety protocols, and reduced crowd size. Yet there was something encouraging in the return of this national pastime, even with all the added safety measures due to the ongoing pandemic.
In response to the coronavirus-tainted reopening of the U.S. economy, legislators also met in D.C. this week to negotiate a new round of stimulus. Federal stimulus has been a strong support for stocks to climb during the rally from the March 23 lows, despite near-term economic challenges. However, key relief measures to households will expire at the end of July, which could slow the overall economic recovery. Below are questions and answers on the minds of investors when it comes to stocks and stimulus.
1. With COVID-19 cases continuing to rise, if there is another shutdown, what impact will that have on the economy?
COVID-19 outbreaks in Florida, Texas and other emerging hotspots have slowed reopening efforts in these regions. As long as new cases stay localized, sporadic and contained, we think it is unlikely that the country will re-enact a national lockdown. However, the path of the pandemic will shape the pace of the economic recovery.
We think that the economy will begin to recover in the second part of the year. After a quick bounce in growth during the third quarter, we expect the recovery back to pre-pandemic levels of economic activity will be slower due to the choppy reopening process while awaiting a vaccine. Last week economic indicators revealed the unevenness of the economic recovery. The Labor Department reported that a staggering 31.8 million workers claimed unemployment insurance across all federal and state programs for the week ending July 41. That's up from 1.7 million workers last year over the same time period1.
In contrast to the struggling labor market, the housing market is showing itself to be a bright spot in the economy. Existing home sales increased 20.7%, and new home sales rose by 13.8% in June versus the previous month2. After stalling earlier this year as stay-at-home orders were put in place nationally, record-low mortgage rates have lured homebuyers back into the market. Thirty-year mortgage rates have fallen from low to lower this year, dropping from 3.7% in January to 3% last week2. Housing, as one of the most interest-rate-sensitive sectors of the economy, is an important watchpoint for markets, serving as both a current indicator of consumer health and a leading indicator of economic recovery.
In absence of a widespread vaccine, we expect the economic recovery to continue, but for the rebound to be uneven.
What can the federal government do to keep the economy going?
Federal stimulus has helped stocks climb 40% from the March low and within 4% of the February high2. On the monetary side, the Federal Reserve lowered benchmark interest rates to near zero to help consumers and businesses weather the economic toll of COVID-19. On the fiscal side, relief measures in the form of direct payments to households, expanded unemployment insurance, mortgage forbearance, and loans to small businesses provided a needed lifeline to the economy.
Progress towards a new stimulus package last week and into this week is being closely watched by markets. Key relief measures in the previous stimulus packages, namely expanded unemployment benefits and mortgage and rental forbearance measures, are set to expire at the end of July. These measures have helped steady consumer spending despite the economic downturn. Since consumers are 70% of the economy, ongoing federal support can help the recovery and provide a solid backdrop for stocks to climb further, in our view.
2. How have other governments responded to the pandemic, and what does that mean for stocks?
Global economic growth is expected to decline 4.9% in 2020, before rebounding 5.4% in 20213. Like in the U.S., the magnitude of the global federal response to the downturn has been more aggressive and earlier than in the previous recession. Total global fiscal support to date is about $9 trillion and growing, according to the IMF. Last week the eurozone took another major step forward in providing a stimulus package, negotiating a $2.1 trillion budget and recovery fund. Approximately $850 billion of this new package will be in the form of loans and grants to the hardest-hit European countries. Similar aggressive actions have been seen across major economies, and will likely continue. Though a return to pre-pandemic levels of growth will likely take several years, coordinated and synchronized stimulus will help support the global rebound over time.
3. Are there non-COVID-19-related risks to the economic rebound?
One non-COVID-19 risk that caught the market's attention last week was a rise in U.S./China diplomatic tensions. The U.S. closed a Chinese consulate in Houston on spying and intellectual-property theft concerns. China reciprocated by shutting one of five U.S. consulates in China in the city of Chengdu. The concern is that a rise in diplomatic tension might negatively impact commitments made by the two countries in the U.S./China Phase 1 trade agreement struck early this year, which prevented a rise in new tariffs. Despite heightened diplomatic concerns, we think that both countries have an incentive to keep the trade deal intact in order to encourage continued trade, which will help support the ongoing economic recovery.
4. Stocks have recovered since the March sell-off. Should I wait for equities to drop again before I invest?
We expect that uncertainty tied to the global economy and periodic setback due to the coronavirus pandemic is likely to keep volatility in the market elevated, even as stock prices continue to rise due to strengthened economic and corporate fundamentals later this year and into 2021. However, the uneven economic recovery would likely trigger occasional pullbacks in the market. That being said, it is difficult for investors to time the market by waiting for the "perfect" time to invest. Given our outlook for the economy to gradually improve over the course of the year and stocks to continue to grind higher, instead of staying on the sidelines we recommend a systematic approach to investing, such as dollar cost averaging. Investing a fixed dollar amount each month takes the emotion and timing out of decision-making and allows investors to benefit from market fluctuation by buying more shares when prices are low and fewer shares as prices rise.
As Major League Baseball showed, reopening in 2020 can be challenging. Similarly, we think the pace of the economic reopening will take longer than initially expected and will require adjustments to business as usual, with additional safety measures put in place. Despite the curveballs thrown to investors this year in the form of a biological crisis and economic downturn, staying true to a long-term game plan, based on a diversified portfolio of stocks and bonds that appropriately reflects their comfort with risks, can give investors something to cheer about by helping them reach their financial goals over time.
Nela Richardson, PhD
Sources: 1. Bureau of Labor and Statistics 2. Bloomberg 3. IMF
|Dow Jones Industrial Average||26,469||-0.8%||-7.3%|
|S&P 500 Index||3,216||-0.3%||-0.5%|
|10-yr Treasury Yield||0.58%||0.0%||-1.4%|
Source: Morningstar, 7/24/2020. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.
The Week Ahead
The earnings season will take center stage, with almost 40% of the S&P 500 companies reporting second-quarter results. Important economic data being released include consumer confidence on Tuesday, the Federal Reserve's interest rate decision on Wednesday, and the preliminary second-quarter GDP on Thursday.
The Weekly Market Update is published every Friday, after market close.
Market indexes are unmanaged and cannot be invested into directly and are not meant to depict an actual investment.
Past performance does not guarantee future results.
Diversification does not guarantee a profit or protect against loss.
Systematic investing does not guarantee a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.
Dividends may be increased, decreased or eliminated at any time without notice.
Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.
Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.
The content of this report is for informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.
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