As soon as we think we understand where we are and where we might be going, something happens to wake us up and show us we are not at all where we thought, and there is no indication of what way we are headed. Unemployment for May surprised everyone, followed by a record retail sales number, and then the COVID numbers started to increase again just as it seems that things are beginning to reopen. The market gyrations since the beginning of the coronavirus pandemic have been unprecedented in history, but the world around us has also given us a glimpse of things we have never seen. The roller coaster of the market has reacted to all these external forces in addition to the turmoil of the protests and aftermath of the ensuing riots and looting. Throughout history, any of these events would have had impact on the economy and the markets, but the perfect storm of all of them occurring across such a short time period has caused more volatility and unpredictable direction for stocks or bonds. We would normally expect that the pandemic would continue to lead to a “U”-shaped curve for the equity markets or more likely towards the “swoosh” that was being talked about last month. However, the economic numbers are leading us to expect more of a “V” curve in the economy as spending, unemployment and confidence numbers have surprised us. The bullish trend has continued to drive the direction ever since the major selloff at the beginning of the lockdown.
Many businesses have reopened, at least partially, and according to a survey by Lending Tree, nearly 70% of their small business customers are concerned they either won’t have enough sales to make reopening worthwhile or they will have to shut down if the infections begin to spike again. While all of this is happening, there is still the issue of 20 million people unemployed that were working before the pandemic and the elimination of the “extra” unemployment income from the CARES Act in mid-July. Also, the Federal Reserve has been adding dollars to the economy since 2008, and I fear that the impact will begin to dwindle soon. Last, but by no means least, the S&P capitalization is now more than 110% of estimated GDP for 2020. Normally 115-125% is seen at the top of a bull market. These are the things that keep me concerned about continuation of the trend. However, the market does not follow any rules, and there is an unprecedented amount of pent up cash that still does not have many other investment alternatives. I believe that the volatility we have seen this year will continue through the elections and, depending on the outcome, could continue throughout 2021.
I do expect to see the trend of the markets to continue in an upward direction throughout the rest of the 3rd quarter with significant swings occurring as a result of news about the virus and economic developments. The appetite for stocks will continue to drive the market until there is enough negative news that the institutions, and not the algorithm driven computer traders, change their long-term bullish expectations.
Do not believe the media hype as it comes along. They are intended to be for a news cycle and while the stories can be frightening (or joyful), most of the news really has become headline focused with much less news and much more noise. Have a fantastic Fourth of July holiday and remember: There is still not a better place to live and work than the United States of America.
Stay Safe and God Bless!