The Rebound

What a crazy year it has already been for investors.  As previously reported, the first quarter of 2020 was one of the worst quarters ever for stocks with the Dow Jones Industrial Average (DJIA) down 21.3%, the S&P 500 down 19.6%, the NASDAQ down 14.0% and the smaller company Russell 2000 down 30.6%.

In contrast, the second quarter was the best for US stocks in over 20 years with the DJIA gaining 18.5%, the S&P 500 gaining 20.5%, the NASDAQ gaining 30.9% and the Russell 2000 gaining 25.4%.  The second quarter market performance has improved the year to date numbers considerably with the DJIA down 8.4%, the broad S&P 500 down just 3.1%, the tech heavy NASDAQ is now up 12.7% and the Russell 2000 down 13%.

Many have been confounded by the strength of the stock market’s recovery in the face of a very weak economy and the continuing impact of COVID-19.  Because of the shut in/shut down the Atlanta Fed now projects that second quarter gross domestic product declined by over 50%.   The economy lost over 17 million jobs during the first four months of the year and the unemployment rate rose from 3.4% to 14.4%.  Second quarter profits for the companies of the S&P 500 are expected to be down 44%.  There have been 3.4 million cases of the Coronavirus and 137,000 deaths in the United States. Yet with all of the negative data the stock market is nearly flat for the year.

The swift and massive actions of the Federal government have gone a long way to stabilize the economy.  The Federal Reserve has lowered the Federal Funds rate to zero, expanded its balance sheet by $2 trillion and will add up to $6 trillion of additional liquidity into the system to provide support.  Congress has already passed a first $2.2 trillion fiscal stimulus package to aid families, the unemployed and small businesses.  As the virus continues to impact the economy it is very likely that Congress will pass a second stimulus package of similar size.

Already the economic data is improving.  Over 5 million unemployed have found work over the last two months and job openings have been increasing.  Other economic data chains have bottomed and turned higher including building permits, industrial production, personal consumption, retail sales…

Stock markets are forward looking.  For markets to do well, the data does not need to be good, it only needs to be improving and the data has been improving.

The surge in COVID-19 cases is concerning and will likely make the economic recovery bumpy.  We may have to temporarily reclose parts of the economy to slow the spread of the virus and prevent overburdening local healthcare systems. There does not seem to be the will to shut down the system in full again however.  The government will continue to support individuals and small businesses until we can return to normal which likely will not happen until there is a vaccine – hopefully that is sooner rather than later.

Be well and stay safe.


Michael Kane