Update on the Markets:
July 2020
Key takeaways
► Stunning comeback for stocks
► Don’t fight the Fed and federal stimulus
► Economy slowly improves
► Easy money made?
► Election getting closer
Stocks Deliver
Stocks bounced back in the second quarter about as much as they dropped in March. The S & P 500 index rose over 20% – it’s the best performance since 1998. The Dow Jones Industrial Average rose 18% – it’s the best quarter since 1987. Not to be outdone, US small stocks delivered a stunning 25.42% return this quarter! All of this as the economy reels. People shelter in place. Businesses shut down. A Covid-19 vaccine is many months away. Corporations not even giving earnings guidance. There seems to be a disconnect between the real economy and the stock market. What gives?
Don‘t Fight the Fed.
I’m sure most of you know about the extraordinary moves the Federal Reserve, Congress, and the White House have made to support the economy through this pandemic. The dollar amounts are staggering. Let’s take a look.
The Federal Reserve plans to inject up to $2.3 trillion into the economy through various programs aimed to calm markets and aid states and municipalities and companies. Their efforts to stabilize the economy include money market intervention, unlimited bond-buying (including high yield debt), and lending facilities to larger companies out of reach of the Small Business Administration. All these efforts have pushed the Fed far past its efforts during the 2008 financial crisis. The Fed has done about as much as it can. And Chairman Jerome Powell has pledged to keep rates near zero until full employment and inflation come back.
To date, four federal stimulus bills have passed, providing the following:
- Testing: $26B
- State and local governments: $217B
- Public health: $312B
- Big corporations: $532B
- Individuals: $784B
- All businesses: $1.323T
- Other: $126B
This totals over $3.3 trillion. To put this in perspective, 2019 US total GDP was $21.43 trillion. In today’s dollars, America’s final bill for World War II cost $4.1 trillion, according to data from the Congressional Research Service. The House passed a fifth bill (the Heroes Act), calling for another $3 trillion to spend on, amongst other things, cash payouts to individuals, unemployment benefits, state and local government, and public health. This bill has very little chance of making it out of the Senate, but another stimulus of some kind is inevitable. The long-term costs of the first four bills will add to the projected US deficit of more than $3.7 trillion in 2020.
President Trump seems keen on more stimulus – checks to individuals, in particular – but Senate Republicans are hesitant about spending more money until more is known about the state of the economy. Any new money will probably go to the healthcare system and small businesses hit by the pandemic.
Economy is healing
It’s not all about the Fed. Economic activity has perked up as businesses large and small partly reopened, and Americans spent some of their savings – there wasn’t much to spend money on in the first quarter. Two-thirds of Americans receiving unemployment insurance benefits received more than when they were working, thanks to the $600 weekly unemployment supplement from the federal government. The household savings rate has shot up to over 30%! Some sectors of the economy never skipped a beat, namely tech, groceries, online shopping, and home improvement: Zoom, Kroger, Amazon, and Home Depot. The labor market is improving briskly from the lows in April. In May, the economy added 2.7 million jobs and 4.8 million in June. Compare this to the nadir of 20.8 million jobs lost as of April. The unemployment rate is 11.1%, down from a high of 14.7% in April.
Election looms
Has the easy money been made? The dire predictions on the economy priced into stocks in March proved to be too pessimistic, and we’ve enjoyed a stunning comeback since. However, the market rally is now slowing with the surge in COVID-19 infections and civil unrest. Businesses in several states have had to curtail their openings. And don’t forget that big election in November. President Trump’s chances at victory are a lot lower now than in February. Would Trump or Biden be better for stocks? Who knows? Every four years, we seem to debate whether a Democrat or Republican is better for the economy. In any case, the stock market dislikes uncertainty and will probably be flat and choppy this summer. Over a one-year horizon, the market will likely maintain its long-term upward trajectory. Maintain your long-term asset allocation this summer and maybe even add to stocks in a pullback.
Please let me know if you have any questions or concerns.
Sincerely,
Henry Gorecki, CFP®
HG Wealth Management LLC
10 S. Riverside Plaza, Suite 875
Chicago, IL 60606
312-474-6496
henry@hgwealthmanagement.com
