June 2020 Financial Markets Summary

The economic data and news continue to be overwhelming and devastating.  The national unemployment rate recently soared to a post-World War II high of 14.7% and will inevitably continue to increase.  Company earnings have been slashed and consumer spending has dropped at an unprecedented pace.  Industrial production declined faster than any month in the index’s 100-year history.  Over 100,000 Americans have lost their lives to COVID-19 and our country is in a state of grief and rage over social injustice.

But in the midst of all of this, the Dow, S&P 500 and NASDAQ have all rallied by over 35% since the March 23^rd lows.  Why is there such disconnect between the market and the economy today?

We cannot point to one specific reason, but the main contributor is likely from fiscal and monetary policy.  The Federal Reserve and Congress stepped in with the largest stimulus package in history in attempt to keep the wheels from falling off.  This infusion of capital has helped stabilize the financial system.

Additionally, 78% of those who lost their jobs said they were furloughed, meaning the unemployment in theory will be temporary.  Goldman strategist Jan Hatzius said this is an important distinction to make, given that it suggests the recovery will be swifter.  “If job losses are concentrated in this segment [furlough], it would increase the scope for a more rapid labor market recovery when the economy eventually rebounds.”

The stock market has historically bounced from the bottom well before the economic data starts to improve.  Sir John Templeton’s quote “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria,” sums it up well.  But Schwab’s Liz Ann Sonders added that “in today’s environment, the stock market may also be on “hopium” with regard to the expected successes of the economy now that it’s reopening and also with regard to finding therapeutics and/or a vaccine for the virus itself.  Case in point: since mid-April, the four best-performing days for the Dow Jones Industrial Average came on days when there was a significant announcement associated with the virus.”

While many unknowns remain and the path forward is far from certain, famed investors are quick to note that the U.S. has bounced back before.  “Nothing can basically stop America,” said Warren Buffett, chairman and CEO of Berkshire Hathaway, at the conglomerate’s first virtual shareholder’s meeting on Saturday. “The American miracle, the American magic has always prevailed and it will do so again.”

 

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