by Brad Houle, CFA
Executive Vice President
Although the goal of our Weekly Market Maker communication is to share economic and capital market news, we would be remiss to not acknowledge what a painful week it has been for our country. As we recap the week, we pay our respect to those working toward solutions that result in positive and lasting change.
There has been a decade's worth of world events in the last three months. An oil price war between Russia and Saudi Arabia, growing tension and trade disputes with China, a global pandemic and this week the worst domestic civil unrest in a generation. Against this backdrop, an equity market (S&P 500) that plunged 34 percent from an all-time high in a record 12 trading days, has now rebounded almost fully with the largest 50-day move in history. Any of these events alone have the potential for a strong negative reaction from the stock market. Taking recent events in their entirety, the resilience of the stock market has been remarkable. With this in view, a frequent question from clients is why is the stock market still going up?
The stock market is forward-looking and is now trading based on the economy reopening and corporate earnings normalizing in 2021. Earnings for 2020 are expected to be terrible based on the pandemic stoppage of the economy and there is little or no expectation from investors. With states gradually reopening and economic data improving from levels that are frequently compared to the Great Depression, the expectation is economic growth picks up strongly in the third and fourth quarter of this year and then continues to expand at a more moderate pace in 2021.
In addition, the unprecedented amount of fiscal and monetary stimulus that is being provided by the government is supportive to the value of risk assets. Through fiscal stimulus, the government is getting money into the hands of consumers and businesses to remain solvent during this crisis. Historically, large fiscal spending packages have resulted in strong returns for stocks in the subsequent twelve months.
Lastly, with persistently low interest rates, investors continue to be pushed into riskier assets; an interest rate of less than one percent on a 10-year U.S. Treasury is not a very compelling alternative to equities. In short, the expected return on bonds are now too low to satisfy the return requirements of individual and institutional investors.
May’s employment numbers were unexpectedly good with the economy adding 2.5 million jobs when the expectation was for a further decline. In addition, unemployment declined to 13.3 percent versus a forecast of 19 percent unemployment. Employment data will continue to be lumpy going forward as the economy reopens however, this was a significant positive surprise.
Week in Review and Our Takeaways for the Week
It been a challenging week for our country and recent capital market activity feels dislocated from the headlines
Employment data will continue to be uneven going forward however, May’s data is encouraging