Nicholas A. Juhle, CFA®

Senior Vice President, Director of Research

Interesting Times

When we hosted 2020 outlook seminars in early January, the now-ubiquitous coronavirus didn’t even make the “other risks” section of the presentation. Instead, we discussed a late-cycle, though firmly-footed economy and a year likely to be shaped by things like the presidential election, US/China trade, and monetary and fiscal policy moves. When we delivered our final seminar in early February, the message was largely the same. We noted COVID-19 as a potential source of uncertainty, but neither we, nor our audience was particularly concerned.

My family spent the first few days of March at Disney World, making good on a promise to our five-year-old daughter Claire who had visited once before, but was too young to remember much. At the time, things were beginning to intensify, but we were still in the “wash your hands more” phase as opposed to the “six foot radius with a mask” phase. Looking back, we may have experienced one of the last “normal” trips to Disney World – sort of like experiencing airports before 9/11. I can imagine someday telling our two-year-old daughter Paige about how different it used to be.

I was in the office on March 10. We hosted our monthly all-staff meeting (more than 100 of us) in a single large conference room without hesitation. Our executive leadership team began meeting daily to prepare in case things got worse, which they quickly did. The meetings started in person, shoulder-to-shoulder around a boardroom table before transitioning to every other chair before going completely virtual over the course of a week. On Monday, March 16, we hosted an oversubscribed conference call with more than 250 of our clients and partners to share our perspective on the coronavirus and its implications for the economy and the markets. Our January seminars were a distant memory. When the conference call concluded, I collected my things and left the office. I haven’t been back since.

I realize my experience isn’t particularly unique. I know I’m not the only person who isn’t exactly sure where all of April and most of May went. I’m sure I’m not the only dad who, on a Saturday afternoon in late May, sat with his eight-year old son watching anxiously as a private company successfully put two Americans into space. I related to him the historical significance of this achievement for our country. One day later, I explained the depth of our nation’s shortcomings to that same eight-year-old as civil unrest reached a boiling point.

Looking back, it is remarkable how much has happened, how much has changed, and frankly how much has not changed over the last six months. This is not the 2020 we were expecting, but here we are. Below, we offer our updated thoughts on the current state of the economy and markets and perspective on what the rest of the year may hold.

Disease in the Driver’s Seat
Social distancing measures enabled the healthcare system to manage the virus caseload, but took a heavy toll on the economy. The ultimate cure for the health-turned-economic crisis will be medical in nature. While we continue to work toward a medical solution, the economy is beginning to reopen, social distancing measures are being relaxed and large civil rights demonstrations have been occurring around the country. Where we had previously observed progress evidenced by slowing new COVID case confirmations, we are now seeing a reacceleration beyond peak levels experienced in early April. Health experts say that the resurgence in cases in Southern and Western states can be traced to Memorial Day, when many officials began loosening lockdowns and reopening businesses.

Fortunately, there are a handful of promising vaccine candidates in the works. Time to market is estimated at 6-18 months (from earlier this year), which means a vaccine could be available later this year or early in 2021… could be available. That scenario still leaves 6-12 months of working to keep a deadly disease in check and an ailing economy open.

A Pivotal Point for the Economy
GDP growth is traditionally expressed each quarter as a “seasonally adjusted, annualized rate” (SAAR). In the first quarter, real GDP declined at a SAAR of 5.0%, which means if first quarter GDP levels persisted for an entire year, they would be 5% lower than the year prior. Economists expect second quarter GDP to decline 37% on the same basis. Clearly, this reflects the extent of shutdowns and restrictions present during April and May in particular. From these levels, a return to economic growth is virtually guaranteed in the third quarter (economists forecast 20%), but the real test will come in the quarters that follow. Economists predict mid-to-low single-digit GDP growth rates throughout 2021, but achieving normalized growth next year is arguably a higher bar than achieving outsized growth in the second half of this year. Our forward experience with the virus, and to a lesser extent fiscal and monetary response from policymakers, will heavily influence the near-term path of the economy.

Jobs Returning, But Many Remain on the Sidelines
Most of the metrics we monitor suggest that the US economy began to rebound in May after bottoming in April, but there is a long way to go and significant risks lie ahead. Unemployment declined from 14.7% in April to 13.3% in May as we appear to be working through the low-hanging fruit. Job gains in May were concentrated in cyclical areas like leisure and hospitality, construction, retail trade, and manufacturing. Starting from an abysmal base amid stay-at-home orders and strict social distancing regulations, it makes sense that some of these jobs bounced back as soon as businesses reopened in any capacity. While job gains could continue in each of these sectors in the short term, each has its own structural issues that could impede recovery in the intermediate-to-longer term.

Economists estimate that we will end the year with 9%-10% unemployment. This implies creation of 6-7 million jobs or about 1 million jobs per month. Unfortunately, what would be an unprecedented level of payroll additions only brings the labor market back to peak levels experienced during the 2008 financial crisis, leaving a gap of six percentage points in unemployment or about 10 million jobs. After the initial record-setting level of job creation, it will likely take years to restore the balance that remains.

Fiscal and Monetary Stimulus Supporting Americans and Markets
The US government has committed nearly $3 trillion in coronavirus relief spending to date. Another $3 trillion relief package (HEROS Act) recently passed in the House, but is unlikely to pass the Senate in its current form. Fiscal stimulus has temporarily plugged a large hole in the economy and enabled many Americans to keep food on the table despite depression-era levels of unemployment. The combination of lower tax receipts and higher spending is driving Federal deficit and debt projections to record highs. The Congressional Budget Office (CBO) projects a $3.7 trillion budget deficit in 2020. Fiscal deficits are bridged by debt and financed by the Federal Reserve through its unlimited quantitative easing pledge – many assume that we have financed stimulus spending by borrowing from other countries, which is not the case. Our national debt increased from $22.7 trillion in 2019 to 25.7 trillion today, however, the CBO projects net interest outlays to fall in FY 2020 compared with 2019 because of lower interest rates.

In addition to financing fiscal stimulus, the Fed has supported financial markets by ensuring liquidity across virtually all credit markets, pledging nearly $2 trillion of balance sheet capacity. Interestingly, the commitment itself appears to have done the trick by instilling confidence as the Fed has only deployed about $130B (6%) of asset purchasing programs announced, leaving a lot of dry powder to deploy if needed.

Record-setting Drawdown and Recovery in US Stocks
Over the last twelve months, the S&P 500 is up 7.5%. Year-to-date, the S&P 500 is down 3.1%. Domestic stocks peaked on February 19 before falling some 35% to a March 23 bottom, before recovering 39% to today’s levels. We did not call the top or the bottom — if you know someone who did, I would love to meet them. Instead, we encouraged our clients to stay disciplined and our advisors to diligently rebalance accounts on the way down and on the way back up. Maintaining the appropriate level of risk in portfolios based on long-term goals and each client’s unique financial situation ensures that they are not overexposed during a decline or underexposed when stocks move higher.

Looking back, it certainly wasn’t obvious that stocks would have recovered to the extent they have since March 23. Looking forward, what confidence can be placed in predictions one way or the other in the next six months? Stocks could move higher or lower in the second half of 2020. It is not hard to make the case for either. There is arguably more short-term risk at today’s levels than there was in late March, but, in our view, no more than should be managed with proper long-term asset allocation and discipline.

Don’t Forget, It’s Also an Election Year
With everything else going on, only recently has the presidential election come back into the spotlight. In November 2019, we wrote an article exploring stock market performance in election years and over presidential terms based on party in power. We concluded that while policy absolutely matters, neither presidential elections, nor the party affiliation of the president was a reliable predictor of stock market returns. We recommended our clients vote with their ballots instead of their portfolios.

Data from PredictIt – an odds maker that allows people to bet on election results – shows that democratic nominee Joe Biden has recently taken the lead from President Donald Trump as the November favorite. A recent survey by CNBC indicates that Biden is currently leading the President on a number of key issues with the economy a glaring exception. This suggests that markets might temporarily reward a Trump re-election, or penalize a Biden victory, but we expect either reaction to be short-lived and acknowledge that a lot can change between now and November.

Conclusion
These are interesting times. As human beings, and as Americans, we are facing a number of challenges in 2020. On a personal level, I hope our clients and friends are staying healthy, navigating these circumstances effectively, and asking for help when needed. Regarding your investments, the short term can be exceedingly unpredictable, but over the long term, we know to expect bumps along the way. Do not lose sight of the fact that your financial plan, and the investment portfolio supporting that plan, were developed with a long-term lens. This too shall pass. Please stay safe and contact any member of our team if you have questions.

COVID-19 Updates

As of August 2

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