Review — Preview
Is it us, or does it seem as if we just went through an entire market cycle in the space of six months as record highs set during the latter part of February were followed by a COVID stoked 34% decline over the ensuing 23 trading days and then a subsequent 38% rally to close out the second quarter.
Despite the potential for a much needed pullback after such an historic rally, it is safe to assume that over the next several quarters (4-8) the economy will improve dramatically – and that is what investors should focus their attention upon and not the dismal upcoming quarterly earnings that will be reported.
As a result of timely responses from the Federal
Reserve, Treasury, Congress and the Trump Administration, the unemployment rate has fallen from 14% to just above 11% with the economy reemploying 7,500,000 Americans. Consumer Sentiment has recovered to pre-pandemic levels as the Manufacturing as well as Service sector components of the Institute for Supply Management’s Composite Index currently indicate expanding economic activity.
Further tailwinds to economic growth include multi-decade low interest rates which has supporting the housing market, consumer spending and supported historically lofty equity market valuations. In our opinion, the Fed will remain accommodative for the foreseeable future.
Nonetheless, we recognize that meaningful challenges remain for the economy and for society on the whole and that a return to normalcy will most likely be a multiyear process. Notably, substantial improvements in employment, specifically in the service and hospitality sectors will remain difficult. Opening our schools poses further hurdles, not only as it pertains to the educational and socialization process of children, but also as it impacts those parents responsible for their care.
Returning to the workforce fulltime may not be an option. Finally, as the pandemic wears on, expect municipal, state and federal budget deficits to become an issue.
Headlining the recent news is the realization that many states have recently experienced outbreaks of the COVID-19 virus while others continue to deal with stubbornly high numbers resulting in an economy that will continue to operate at suboptimal levels until an effective antidote and vaccine is discovered, hopefully during the first half of 2021.
Lately we have been receiving numerous calls regarding the upcoming Presidential Election and the risk specific outcomes may pose for the financial markets. Although historically it has been irrelevant whether a Republican or Democrat occupies the oval office, this November may be different and bears watching.
A reelection of President Trump would probably come as a result of an improving economy between now and election day whereas a President Joe Biden would most likely cause some shortterm consternation for investors but might offer a better chance for an infrastructure program as well as improved relations with our traditional allies.
Love it or hate it, the financial markets will probably respond most favorably to a split between the executive and legislative branches as it will maintain a certain level of checks and balances. Time will tell. We think it short-sighted to make too much of it either way.
Despite our belief that the rally will be uneven from these levels, keep in mind that including the second quarter, there have been only ten quarters since WWII in which the stock market has rallied more than 15% and every time stocks have been higher over the following quarter.
Although we think this record will be difficult to maintain, due to the trillions of dollars of fiscal stimulus being pumped into the economy vis a vis transfer payments, we also believe the downside to be limited.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call (518) 279-1044.