As July came to a close, the major categories of equities generated some degree of gain. While still negative for the year, emerging markets, international developed-markets, and U.S small-cap stocks showed growth. The standout winner of this group, however, was emerging markets. Emerging markets posted a total return of about 9%. U.S. large cap stocks still sit below their mid-February high, but they too made gains and nudged into slightly positive territory for the calendar year.
The U.S. Economy
These positive returns show that markets remain resilient in the face of the current weak (and much- anticipated) economic data. The unemployment rate continues to be in the double digits, and the initial estimate of second quarter 2020 GDP was an annualized decline of 32.9%. On the corporate profits front, FactSet reported a year-over-year quarterly decline of 42% for companies within the S&P 500 benchmark, based on actual and estimated reports. Additionally, a second wave of COVID-19 has flared up in the United States, and other countries that seemed to have the virus under control have begun to report second wave infection clusters. These new cases have caused governments to reimpose social distancing measures, likely slowing the pace of economic recovery.
Given the current backdrop, our clients may be wondering, “how can markets remain so robust?” Equity investors continue to look past the current negative data and have shifted their focus to 2021 and 2022, and to what those years will bring. Investor optimism has also been aided by heavy levels of fiscal and monetary stimulus, including expanded unemployment benefits, direct stimulus checks, special lending and grant programs, and record-low interest rates due to the Federal Reserve’s balance sheet expansion.
Operation Warp Speed
Another positive element is the lightning speed of research and development related to a COVID-19 vaccine, which has already led to several promising candidates. Three of these treatments have been selected for stage three trials by the U.S. government’s “Operation Warp Speed”, including at least one that could potentially be mass distributed prior to year-end if shown to be effective. If such an event did indeed occur, it would be unprecedented in human history. While there is no guarantee of success, there are also another 160+ potential vaccines in various stages of research around the world. A vaccine with a high rate of effectiveness would hopefully reverse a lot of the ill economic effects caused by the virus, and create a welcome rebound in the travel, restaurant, and entertainment industries.
In conclusion, the mood of the market remains optimistic and driven by expectations of better days in the future, largely shrugging off the challenging economic landscape we find ourselves in. Thus, the staying power of the market’s rally will likely be driven by the ever-changing outlook. As our team continues to shelter-in-place, we continue our communications with you, our clients. We hear how you are taking precautions, limiting exposure, and continuing to take COVID-19 very seriously. This serves as a heartening message to us about the kind of clients we serve. As always, please contact us if there is anything we can do for you.