EQM Capital LLC 2Q 2020 Market Review – “V” Doesn’t Mean Victory

Posted on Jul 4, 2020

“V” for Victory?

The U.S. stock market capped its best quarter since 1998, almost completely reversing the market’s worst quarter since the financial crisis when COVID-19 propelled the economy into a screeching halt. In a “V-shaped” recovery, the S&P 500 Index rebounded nearly 20% in the second quarter, ignited by a mass infusion of Federal aid and interest rates pinned near zero. The tech-heavy NASDAQ Composite fared even better, rallying more than 30%, posting its best quarter since 1999.

But we have hardly won either an economic or medical victory against the pandemic.  Millions of Americans are still unemployed and many segments of the economy remain under duress.  Furthermore, as the economy has opened up, it has spurred a spike in cases of the virus in many parts of the country, especially in the sunbelt states such as Florida, Arizona, Texas, and California. 

Dr. Fauci, our nation’s top infectious disease specialist, warned that the number of daily new reported cases could surge to 100,000 a day if Americans don’t mask up and stop acting like they are on a summer vacation.  Many states are rolling back their re-openings, re-shuttering businesses such as bars and dine-in restaurants and mandating the wearing of masks. Will it be enough to stem the surge in cases?  Or is it already too late?

The U.S. stock market recovery remains “V-shaped”, but investors may have declared victory too soon.  Markets have suffered some bouts of volatility, COVID-on, COVID-off, as infection rates have surged, but remain upwardly biased.

Second Half Risks

Beyond the uncertainty created by the prospect of a second wave of the virus, the upcoming presidential election in November, renewed trade tensions with China, and rising civil unrest, are other risks on the horizon for the second half of the year.  The pandemic has magnified social tensions by increasing unemployment, highlighting inequality and unsafe working conditions, and spotlighting a national healthcare crisis. If this sentiment results in a change of leadership post the election, and the Democrats sweep both Capitol Hill and the White House, that could translate into major policy reforms, which also may be accompanied by higher taxes.

An interesting study put out by LPL Financial, reveals that going back to 1928, the S&P 500 has correctly predicted the winner of the presidential election 20 out of 23, or 87%, of the time.  While none of those years also coincided with a global pandemic, historically when the stock market is higher going into the 3 months prior to the election, the incumbent party is victorious. 

Stock markets do not typically like uncertainty, and yet here we are with a raging bull market, sitting near record highs.

So what factors are investors pricing in?

  • The Fed continues to pump money and liquidity into the system,
  • Economic data and the pace of the recovery has been better than expected,
  • Multiple COVID-19 vaccines are being developed and look promising, and
  • Washington DC is likely to pass an additional stimulus package. 

Earnings season starts in two weeks.  It may provide, for better or worse, further clarity regarding the extent of the economic recovery.  And of course, a COVID vaccine or breakthrough treatment could be a game-changer as well.  Hope springs eternal for an end to this pandemic. 

Disclosure

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