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A Market Looking Ahead with Optimism

A Market Looking Ahead with Optimism

| July 28, 2020
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No one knows with any real certainty how much, or for how long, the Coronavirus will impact our lives and the world economy. With such uncertainty, many have expressed surprise that the equity markets have shown such resilient strength and have rebounded so quickly. In fact, the second quarter of 2020 was the 9th best quarter for the S&P, with a 20.5% return over the period. This comes directly after an especially harsh downturn towards the end of the first quarter. The NASDAQ index lead the way and outperformed the S&P with technology companies directing the charge during the pandemic. What then has led to this market surge? Here are a few contributing factors that we believe have and will continue to drive stocks during the current pandemic environment.

➢ Interest rates remain near historic lows, with the Federal Reserve committed to keeping rates low for the immediate future. Additionally, Federal Reserve chairman Powell has also spoken out against pushing rates negative, which has helped bolster both the equity and fixed income markets.

➢ The government has made a commitment to do “whatever it takes” to stimulate the economy and has shown a growing evidence that the coordination of monetary and fiscal policy has become a new normal. The amount of stimulus we have seen by the US in response to this crisis is unprecedented, and developed countries around the world are also pulling monetary and fiscal levers.

➢ Valuing the stock market by comparing the forward earnings yield to the 10-year U.S. Treasury bond shows that stocks hold a wide advantage. Today, the forward earnings yield of the S&P 500 is over 4% and the 10-year U.S. Treasury bond closed the second quarter with a yield of 0.66% making stocks look far more attractive on a relative basis.

➢ Tech and media companies are leading the way with sales and earnings growth. Companies such as Microsoft, Amazon, Facebook, Google and Apple have been leaders in the market rebound and seem to be gaining ground and customers during the current Covid-19 pandemic. They make up over 20% of the total market cap of the S&P 500, an unprecedented level of dominance.

➢ The low point for many economies may have come and gone. While there is currently a spike in the number of new virus cases, there is now a better understanding by medical professionals as to how to test, treat, and care for patients. While we believe many of these factors that are adding underlying support for stock and fixed income markets will remain in force, we know that it is important not to be complacent during such a unique and ever-changing period. Certainly, there remains risk to the global economy that requires monitoring. As companies begin to announce their second quarter earnings, many analysts expect to see weak numbers and slashed dividends. These announcements may take some the wind out of the recent equity rally and certainly should add volatility. Additionally, COVID-19 continues to dominate the news cycle and the realities of the health crisis will remain omnipresent.

Finally, it is important to look through the recent and quite tragic events in the United States and remember that the US elections are only four months away. Political uncertainty and rapidly shifting economic factors have made any policy predictions incredibly difficult.

It is hard to tell exactly how the economic recovery will progress. Whether it will be a quick V-shape, a more prolonged U-shape, or a delayed L- shape recovery will mostly hinge on the response by the medical community and federal and local leadership in the ongoing virus fight. However it plays out, we will remain focused on our rules-based investing strategy to help pull emotion out of investment decisions and concentrate with a long-term wealth building prospective. We believe that given the current investing environment it is more important than ever to be active with investing and equity options to enhance yield and reduce risk. Selectivity by sector, industry and individual companies is critical to providing the best returns for our investors. Additionally, alternative investments such as our current gold position have provided an added profit component to our client portfolios.

 

Myself and our entire team continue to pray that all our clients stay healthy and safe as we all navigate through the current pandemic.

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