Welcome to Summer!
Following an impressive rebound in risk asset prices and valuations in April and May, June saw markets take a breather finishing relatively flat, unnerved by a re-acceleration in COVID-19 cases in the final weeks of the month. In fact, the second quarter of 2020 (Apr-Jun) saw the strongest performance for the S&P 500 index in the U.S. in over 20 years (1998).
Like many investors, we continue to try and make sense of this outstanding stock market performance in the face of such negative headline news. The chart above, which attempts to gauge the sentiment/confidence that investors have in the markets, still suggests indifference. We see this neutrality as a positive, as it potentially sets the stage for the current rally to continue.
This is not to say that we view the health risk of COVID-19 as any less severe. Clearly, the uptick in cases in the US over the past few weeks is alarming (chart below). The economic data however, seems to suggest that the trough in economic activity is behind us, which technically means that we could be early in a new cycle.
Consider that US retail sales have already recovered +62% of their decline (chart below). Meanwhile, the consensus expectation for 8 million U.S. job losses in May turned out to be wildly inaccurate, with the country actually adding 2.5 millions new jobs instead!
What’s fueling this economic rebound? Unprecedented liquidity in the form of direct assistance payments, financial asset purchases and zero interest rates.
According to a recent CNBC article, US banks are ‘swimming in money’ as deposits have increased by $2 trillion since the coronavirus first struck the U.S. in January. For consumers, this represents an increase in the personal savings rate of over 30% (a level we have never witnessed in recent history (chart below)). The hope among investors is that all of this savings would translate into an equally unprecedented spending boom which could re-accelerate the economy and reignite corporate profits.
Another investor positive has been the shift away from locking down the economy as a means to contain the virus. Data continues to suggest that unlike the Spanish Flu, the Coronavirus seems to have less of a negative impact on the working age population. This is to suggest that if we were to experience a second wave of the virus, we would be more likely to see a pause in ‘re-opening’ rather that a new lock-down.
So given this somewhat more optimistic economic backdrop, where do we expect markets to go this year? While it is difficult to predict the myriad of potential seen and unforeseen risks in the world, if the parallel between the current recovery and the 2009 rebound continues to hold – prices could continue to climb higher (chart below). The 2020 market crash was much sharper (-34% in just 2 months) than the more severe 2009 Great Financial Crisis (-57% in 18 months), however the similarity in the path to recovery so far is undeniable.
A fundamental difference does exists however between 2009 and now – and that is that a U.S. election is due in just 4 months. While some experts suggest that the recent weakness for the Republicans is having a negative impact on the stock market, other experts suggest just the opposite… Arguably, Biden is seen to bring stability to international relations and policy-making, however his position on the fiscal front remains a major question mark for markets.