The Wiser Roundtable team provides a market update for the second quarter of 2020. The stimulus package, zero interest rates and unemployment are discussed along with market commentary for the remainder of 2020.
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The first question I get from most clients and people that know me is, “which direction is the stock market headed over the next six months?” It’s a good thing I don’t get paid to predict short-term market results because focusing on the bigger, more predictable, picture is much more rewarding for everyone. However, even while focused on the long-term, you do need to have some idea of short-term risk. For this, I look to the larger players in our industry for unbiased data on what may lie ahead.
US Economic Conditions
A recent Vanguard July economic report stated that the US economy will show positive growth in the third quarter of this year but carry significant risks. Currently, we are likely experiencing the deepest economic contraction on record, but Vanguard economists expect the recession to be short lived (shortest ever). For 2020, the US economy will retract by 7% to 9% with a second quarter retraction of 30% to 40%. However, they predict that positive growth will be coming in the second half of the year. BlackRock, although not as specific, also maintains that the last half of 2020 will show growth in the US economy. Looking at Europe, Vanguard shows their economies growing in the second half of 2020 as well. BlackRock also acknowledges growth, but does not see it as an overwhelming opportunity for investment.
While a country’s Gross Domestic Product and stock market returns do not move together, in this crisis, the market is looking to GDP as the indication that business is stabilizing and rebuilding. The 30% to 40% retraction is already priced into the market. Perhaps a strong recovery is as well. The second half of the year will certainly have volatile days as the real data will have to be reconciled with the market’s assumptions.
The Federal Reserve is expected to keep rates near zero at least through 2022. The Fed is also purchasing the bonds of large corporations to support market liquidity and credit for large employers. This translates into low savings and bond yields for the foreseeable future. How you view stocks in relation to bonds will redefine portfolios over the next few years.
Vanguard sees unemployment dropping to 10% by the end of 2020.
How do we pay for a global COVID19 related stimulus?
Developed countries have issued more than $9 trillion in stimulus to fight the economic impact of COVID19. This came in the form of spending, loans and loan guarantees. More than half of the world stimulus was issued in the loan and guarantee category. Vanguard explains, “Loans and equity stakes can be thought of as government investment in those assets. Thus, any increase in debt from those disbursements could be reversed as those equities are sold or as the loans mature, except for a small percentage of possible bankruptcy losses.” They note it took about two years for the 2008 financial crisis stimulus to play out. We should not focus on the amount of debt, but rather the cost of servicing the debt vs economic growth.
Stock market going forward.
Vanguard, BlackRock and State Street all show a positive market over the next ten years. Even over the next twelve months, their outlooks are positive for stocks, but with high volatility. Economists, like Professor Robert Shiller, are still indicating that US stocks are overpriced, but this is likely to persist with the bond market returns expected to be less than 1% over the next ten years. Money will flow more to equities to keep up with inflation and collect a higher yield with dividends. We know that a long-term focus is needed to be successful in investing. Any funds needed over the next few years (income, home purchase, etc.) should be held in cash. For this year and the next, the success of the market will depend on the following as outlined in State Street’s economic reports:
- How successfully countries and regions strike a balance between the public health burden and the timing of lockdown exits.
- Whether or not we achieve significant biotech advances toward an effective drug treatment and/or vaccine for COVID19.
- Whether or not fiscal stimulus packages manage to mitigate the negative economic impacts of the pandemic.
- How well central bank programs work to ensure liquidity.
- What shape the recovery will take as economies operate in a semi-constrained environment.