Note: This market review was published on July 15th, 2020 and may not be reflective of current market or investing issues.
The first half of 2020 brought volatility back to the markets that has not been seen in a decade. Not only did we see the fastest 30% decline in the history of the U.S. equity markets, but in the second quarter, markets staged a nearly equal rally. As of the end of the second quarter the NASDAQ had reached an all-time high, the S&P 500 came within less than 5%1 of reaching its all time high, and the Dow Jones Industrial Average came within 8% of its all-time high2. This rally was led by technology stocks and those that facilitate the movement toward a work from home culture in the United States.
The equity market rally in the United States has been faster and stronger than seen in other markets around the world, and has also happened while the economy has suffered some of the worst performance in decades. Unemployment skyrocketed from less than 5% to more than 14%3, the Gross Domestic Product (GDP) of the United States is expected to decrease by more than 35% in the second quarter4, more than 8.5% of homeowners are currently not making their mortgage payments5. The U.S. stock market seems to be almost completely disconnected from the real economy.
If the stock market really is so disconnected from the real economy, then what is fueling the markets strength? There are a few things that are going on that are supporting markets. First, is the amount of stimulus being provided by the Federal Reserve Bank (the Fed) and the Federal Government. Second, the amount of COVID-19 cases may be rising, but the death rate in the U.S. has continued to fall. Finally, there have been many announcements by pharmaceutical companies like Moderna, Novavax, and Pfizer around treatments and/or vaccines for the Coronavirus.
The stimulus from the Fed and from the Federal Government is already at levels that we have never seen before. They have taken their overnight lending rate to 0%, as they did during the Great Financial Crisis in 2008, but they have also increased their Quantitative Easing program to include both investment grade and non-investment grade corporate debt. They have bought billions of dollars of U.S. Treasuries, mortgage-backed securities, and corporate bonds in only a few months’ time.
As states began to reopen from their lockdowns throughout the second quarter of the year, we have started to see a dramatic rise in new cases of COVID-19. While this is a concerning statistic, there is a silver lining that has helped the sentiment in the stock market, and that is that the fatality rate has continued to decline. The first few weeks of July will be critical for this, as the number of deaths do tend to lag the number of cases. If we do not begin to see an increase in the fatality rate, we can expect the trend to continue.
The news that has continued to have the largest effect on the U.S. market is optimism around a vaccine or treatment that is effective against COVID-19. There are currently multiple companies that are researching a vaccine, and research has shown that Remdesivir (a drug made by Gilead) decreases the severity of the disease and the length of a patient’s hospital stay. This is important as one of the biggest concerns about this pandemic was that hospital systems may be over-run. The faster that patients can recover and be released from the hospital, the faster a bed and supplies can be open for another that needs them.
While there has been a lot of good news lately, it is important to remember that there is a lot that we still do not know about this virus and that we will likely not know for months to come. The fatality rate has come down, viable treatments have been found to decrease the length and effects of the disease, and the economy is beginning to re-open and show signs of life. We have a long way to go, but for now it looks like the worst may be behind us.
Longview Financial Advisors, Inc.
3: “Civilian Unemployment Rate,” U.S. Bureau of Labor Statistics, June 2020, accessed July 02, 2020, https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.html
4: “GDPNow,” Federal Reserve Bank of Atlanta, July 02, 2020, accessed July 02, 2020, https://www.frbatlanta.org/cqer/research/gdpnow
5: Adam DeSanctis, “Share of Mortgage Loans in Forbearance Increases to 8.55%: Mortgage Bankers Association,” MBA, June 16, 2020, accessed July 02, 2020, https://www.mba.org/2020-press-releases/june/share-of-mortgage-loans-in-forbearance-increases-to-855
Disclosure: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available upon request.