• Matthew Davis, CFP®

Mid-Year Economic Update

We're halfway through 2020 and what a year it has been so far. COVID-19 continues to dominate the headlines as we see a resurgence of infections across much of the country. Economic statistics are finally catching up with just how quickly and deeply our economy has been impacted by the quarantine. Yet despite all of this, the stock market recovered sharply in the 2nd quarter. We will start with an update on the coronavirus and then dive in to understand if this rally is sustainable.


Coronavirus

Infections in the US initially spiked during the end of March and the first couple of weeks of April. Stay at home orders helped slow and eventually reversed the course of infections as we saw declining confirmed cases even with increases in testing during the last parts of April, all of May and the beginning of June. Unfortunately, cases have surged again in recent weeks, and we see many policies re-enacted to try and flatten the infection curve again. So far, hospitalization and fatality rates have lagged infection rates during this resurgence, and the hope is that they will continue to do so. Speculation on why has ranged from younger people being more likely to be infected at this point to an improved understanding and treatment of the virus. Since the hospitalizations and fatalities naturally trail the infections, this will continue to be an important indicator that we track as it could significantly impact policy going forward.


Progress towards a vaccine continues to be an essential step to fully reopening the country. Estimates have varied in range, but consensus puts around 5% of the population infected so far. The Mayo Clinic estimates that herd immunity occurs naturally after about 70% of the population has recovered from the infection or roughly 200 million people. Because of this, an incredible amount of time, energy, and money have poured into finding a vaccine. Hope remains for at least one of the many vaccines being developed to be viable in the first half of 2021. As we wait, several countries worldwide have demonstrated it is possible to suppress infection rates with carefully managed policies allowing some semblance of returning to normal and business/social activities to return.

Economy


COVID-19’s impact on the US economy has been incredibly fast from a historical perspective. Unlike the 2008 financial crisis that had a snowball effect over time as various industries were caught up in bad debt contagion, the pandemic had a dramatic and immediate impact on unemployment. Unemployment has surged to well over 13%, reaching levels that far exceed 2008 and have not been seen since the Great Depression.

Despite the historical disruption to business, the pandemic crisis has not felt the same as the financial crisis. First, there has been an incredible amount of fiscal and monetary policy enacted by both the Federal Reserve and Congress. Congress alone has spent nearly $2.5 trillion in various aid packages to help offset the pandemic’s impact. One of the lessons learned from the financial crisis was the risk of contagion, and policymakers were quick to step in this time. The Federal Reserve has also dusted off its various Quantitative Easing (QE) strategies and expanded the markets it was willing to intervene in. This has limited some of the initial economic fallout as many businesses were forced to alter the way they did business.


In addition, the current consensus is supportive of a quick recovery. With continued optimism that a vaccine will be developed within a year, the hope is that we will be able to recover in 2021 sharply and to return to pre-pandemic rates of growth over the following years. If there are delays in the vaccine, this could shift the market’s mentality significantly.

Stock Market

With relative economic optimism going forward, the stock market rebounded strongly in the second quarter. What makes the return so remarkable is how violent the sell-off was to begin with and how short-lived the depths were. For comparison purposes, the financial crisis saw six consecutive negative returning quarters before the recovery began.


Also of note is just how volatile this year has been. This chart shows that the market has exceeded 2% and 3% returns either up or down since the beginning of 2018. In 2018 and 2019 combined, the market moved more than 3% only seven times total. There were 19 moves exceeding 3% in the first quarter of this year alone.

The recovery so far in the stock market has been about as strong as we could hope for, in our opinion. We continue to track many risks with increased attention to potential policy mistakes and the upcoming election. Typical valuation analysis is complicated in extreme events like these, with many companies suspending forecasts due to the pandemic’s unknowns going forward. Using our economists’ estimates, we believe the market most likely has recovered to appropriate levels given the current consensus economic outlook. However, those views can change rapidly with new information about either the virus or any significant policy changes. The long term impact of the pandemic is still tough to quantify at this point. While we remain optimistic that our economy will bounce back, there will be some long term impact on how many industries do business going forward. We continue to rely heavily on asset allocation and making the right choices ahead of time to ensure we can ride out any future surprises. Bonds continue to do well and remain the bedrock of the majority of our portfolios. If you have any questions or if there is anything any of us can do for you, please do not hesitate to reach out.

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Westlake Village, CA 91361

Email

info@sherwoodfp.com

Phone

805.870.5591

 

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