Thursday, July 3, was another record-breaking day in the US financial markets as the economy recovers from the coronavirus panic that has gripped the financial media since late February. As we received the monthly report on employment, the second consecutive month of significantly stronger-than-expected jobs numbers, the Nasdaq Composite Index, a collection of over 2500 stocks heavily weighted by technology stocks, made a new all-time high.
HOW CAN MARKETS HIT NEW RECORD HIGHS WHEN THE ECONOMY IS IN SUCH A MESS?!
John Stepek of London’s MoneyWeek magazine, posed the almost too obvious question in his newsletter the same day as the record high. He went on to point out that the economy and the stock market are two very different things. Conventional wisdom (be careful with consensus thinking) has always thought that the stock market is anticipating fundamental events that are six months or more in the future.
But not all markets are hitting new highs. The Nasdaq contains many of the “new economy” stocks that actually benefit from the acceleration of the working from home, shopping from home, or entertaining yourself at home trends, so the new high is not so surprising when you look at the underlying stocks.
However, stocks in general, as represented by the S&P 500, have not fared quite as well. Many of the financials (hurt by the low interest rates and potential loan defaults), the transports (think airlines), the real estate (hotel, mall, office building REITS), and the energy stocks (hurt by the slowing oil industry) have not bounced back with the same momentum.
So, looking ahead to 2021, what effect could the pandemic have on our economy, and more specifically on our public companies in 2021? There is no question that the coronavirus has had an unprecedented negative impact on many sectors of the economy. So, what could the market be anticipating that would drive stock prices up so fast?
IS A VACCINE COMING SOON?
According to the New York Times, researchers around the world are developing more than 145 vaccines against the coronavirus, and 21 vaccines are in human trials. Vaccines typically require years of research and testing before reaching the clinic, but scientists are racing to produce a safe and effective vaccine by next year.
Preston Caldwell, Head of Economics and Equity Analyst at Morningstar provided some optimism in his report on June 22:
“We expect broad availability of a vaccine to erase COVID-19’s direct impact on the U.S. and global economies by mid-2021. The need to social distance will continue to weigh heavily on some parts of the economy through the rest of 2020. However, positive data about the vaccine’s efficacy should arrive in the second half of 2020 (this year), bolstering consumer and business confidence and promoting a broader recover in the economy.”
Even Dr. Fauci seems to be optimistic that there will be a vaccine identified sometime this year. That would be a great Christmas present for the world!
EFFECTS ON VARIOUS INDUSTRIES
While the loss of 20 million jobs was historic, the recovery of the job market has been equally historic. But even though the loss of a job is devasting to anyone personally affected, jobs in different industries have sharply different effects on our economy.
The Morningstar report gives us an example:
“The highest-affected industries (for example restaurants) account for 15% of U.S. payroll employment though just 6% of U.S. GDP.”
The Covid has wreaked havoc on the travel, hospitality and restaurant industries, but consumers have been ramping up spending on many high-ticket items that give a larger boost to the economy.
Home sales have jumped, helped by low interest rates and an accelerated move out of big cities. Rick Beckwitt, CEO of Lennar Corporation, the second largest home builder in the U.S., stated in his quarterly call on June 17:
“In May, we saw an influx of new homebuyers wanting to take advantage of extremely low mortgage rates and move out of apartments in densely-populated areas and homes they were sharing with friends and family during the pandemic. We also heard increased conviction from people wanting to buy a new, safe and clean home versus an existing home.”
He went on:
“In May, our new orders increased each week sequentially and were up 7% over the prior year. More importantly, our increase in sales was generally achieved while raising prices and reducing incentives throughout the month of May.”
Similar activity has been reported in the RV Industry, the boating industry and the off-road vehicle industry, all of which have an outsized impact on GDP because of the size of the purchases. Morningstar’s Caldwell adds:
“We expect a sharp GDP rebound in the second half on 2020, with 5.9% growth in the third quarter and 3.2% growth in the fourth quarter. Crucially, we think consumer and business confidence will surge in the second half of 2020 as data rolls in on the efficacy of vaccines, even though actual production and deployment of vaccines won’t fully ramp up until 2021.”
OTHER FACTORS WE ARE WATCHING
As we mentioned last month, the massive stimulus provided not only by our Federal Reserve and Congress, but by central banks around the world, will show up in current job creation and consumer spending or else it will be saved with much of the savings ending up in stock investments. Keep an eye on an additional stimulus package being discussed in Washington, as that could provide more fuel to the stock market.
On the cautious side, the upcoming earnings season will have many opportunities to surprise investors, both positive and negative. And as the November elections approach, the news could add volatility to an already nervous market.
Volatility is a factor we will probably have to live with for the next several months, but longer-term prospects still look bright. Continue to let us know if you have any specific concerns, and we will hope to resume client meetings soon. We look forward to a return to normalcy soon!
Dave Crouch Kim Blackburn Kay O’Connell
Registered Principal Branch Operations Manager Financial Advisor
"We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the author(s) and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided herein will proved to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The S&P 500 is an unmanaged index of 500 widely held stocks this is generally considered representative of the U.S. stock market. The NASDAQ Composite Index is an unmanaged index of securities traded on the NASDAQ system.