September 2020
Marketing Briefing

U.S. Markets

Recap

For August, U.S. stock markets largely continued to move upward. Price increases were broad with the Dow Jones Industrial Average up 7.6%, the S&P 500 up 7.0% and the Russell 2000 up 5.5%.   The tech-laden Nasdaq rallied another 9.6%, bringing its year-to-date gain to 31.2%.  Many investors remain puzzled, and some perplexed, by the stock market’s surge. Considering the severity of the prevailing economic downturn, the gains have been spectacular. 

Generally, the reporting season for earnings wound up with little fanfare as extreme negative results were widely anticipated.  In sum, quarterly earnings took a huge hit with total earnings for the 458 companies of the S&P 500 members that have reported being down 35.4% on 11.3% lower revenues.

A Melt-Up

The dramatic rise in U.S. stock prices, especially for many tech stock prices, has been characterized as a melt-up – the condition when price increases are driven more by sentiment than by real, fundamental factors.  While celebrating the gains, many market participants and analysts are conflicted with concerns about what future volatility may lie ahead.

What explains the spectacular stock market gains if not earnings, and if not the economy?  Many believe the explanatory factor and overwhelming driver of recent stock market performance to be the massive flood of stimulus provided by the U.S. and foreign governments in providing liquidity throughout the global economy.

In Advisor Asset Manager’s Viewpoints published on July 27th, Matt Lloyd offers counter points to the myriad of depressed sentiment and doomsday headlines.  He aptly suggests that a key determinant of how severe an economic downturn becomes is the degree of market and economic liquidity that is present.  The information he offers provides insight to significant and atypical variables that seem to be boosting investor confidence.  He notes that by some measures U.S. liquidity is at their highest levels not seen since 1992, particularly with regards to household cash reserves versus debt.

Additionally, and critically important, is the magnitude of the global central banks’ liquidity response to the prevailing COVID-19 economic shock relative to the last time we saw a coordinated global response, the Great Financial Crisis of 2008/2009.  The table below details and compares the amount of economic stimulus provided by various countries during the Great Financial Crisis versus the stimulus thus far undertaken in recent months.   In addition to stimulus, additional liquidity strategies are being massively deployed by central banks through their own purchases of debt, equity and various assets.

Also noteworthy is the insight that significant portions of already passed COVID-19 legislation remains to be disbursed.

Despite investor optimism and impressive stock market gains on Wall Street, the tone on Main Street turned more pessimistic in August as consumers and small businesses remained rightfully apprehensive about their financial well-being.

Consumer sentiment improved only ever so slightly in the last half of August with the University of Michigan’s consumer index moving from 72.8 to 74.1.  The fact that it remains far below pre-virus readings at the 100 level reflects the lack of consumer spirit about prospects for the economy and business conditions.

Consumer confidence, which is keyed to employment, did not show any lift at all.  Instead, the Conference Board’s index fell nearly 9 points to 84.8, off steeply from the end of January 2020, when it stood at 131.6.

On Main Street, a pervasive sense of uneasiness and caution prevails.  Top of mind questions for consumers and market participants are:

  • Just how bad is it really?
  • How will it be solved?
  • How long will it take?

Of course, for most the bottom line for severity depends on whether one still has an income.   The data from August indicates that gains in the job market were modest and appear to be slowing.  Based on this week’s Bureau of Labor report, the unemployment level inched down to 8.4%.

In August, 24.2 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic–that is, they did not work at all or worked fewer hours at some point in the last 4 weeks due to the pandemic. This measure is down from 31.3 million in July.

Continuing unemployment claims through the month of August averaged 1.068 million which is evidence of the substantial and severe rates of layoffs and business closures still underway.

The month of August began with a growing surge of COVID-19 transmissions turning many states into virus hotspots.  Over the course of the month and with widespread mask protection, new COVID-19 cases nationwide fell steadily, but now appear to be flattening out at over 40,000 cases per day. The ebb and flow of the viral spread brought relief to the former hotspots of Arizona, Florida, California and Texas; while outbreaks have recently been growing in Midwestern states, including Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, Ohio and the Dakotas.

Looking Ahead

Infection rates may be easing, but according to Dr. Ashish Jha, director of the Global Health Institute, “There are several months ahead before this starts getting meaningfully better.”

The uncertainty about household income, along with uncertainties about the evolution of the virus, the possibility that government support will dry up, and the prospect of more job losses are all key factors behind the decline in consumer confidence.  These concerns will likely cause consumer spending to cool in the months ahead.

In the near term, we expect campaign rhetoric to increasingly clamor to share media headlines with news developments on congressional negotiations for the next phase of economic stimulus.  Amid this backdrop, the positive bias for U.S. stock markets may continue, albeit volatile, with investor confidence remaining resilient based on beliefs that the massive federal intervention and stimulus will sufficiently provide needed relief and support for a wounded economy on the mend.

 

Any specific securities referenced in this commentary may or may not be held in client portfolios.
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