“Everything is cyclical.” — Lee Cooperman
Second Quarter Highlights
The quote from legendary hedge fund manager Lee Cooperman sums up all facets of our current economy, even those previously considered immune from a downturn.
After the sudden demise of the longest expansion in modern history, the “risk-on” trade prevailed in the Spring of 2020, with most global assets appreciating significantly.
- U.S. stocks had their best quarter in two decades, recovering most of the ground lost in the first quarter.
- Commodities, including oil, copper and precious metals went up sharply.
- Fixed income was more mixed, with corporate bond prices moving higher. Treasuries, the safe haven, traded in a narrow range.
- The U. S. dollar finally dropped from lofty levels. However, there does appear to be a disconnect between surging markets and the still weak economy.
A Bottom to the Flash Recession with New Concerns
First quarter GDP fell 5.0%, reflecting the plunge from the middle of February. The second quarter will likely be much worse, although we believe the economy actually reached its nadir in mid to late April. Unemployment peaked close to 20%, though it has rebounded nicely — June’s report showed it at 11.1%. Other measures of economic activity, such as auto, retail sales and housing, also displayed a notable turnaround.
An interim peak in new Covid-19 cases in mid-April along with the effects of government stimulus contributed to the partial snapback. By early May, Sunbelt states which had not suffered as badly as the Northeast began aggressively reopening, defying advice from health experts to proceed more cautiously.
The economic rebound lasted until mid-June, when a resurgence of new infections in Texas, California, Arizona, Florida and other Sunbelt states prompted authorities to reimpose restrictions. As the quarter ended, there appeared to be a moderation of recovery, with high frequency reports such as airline and restaurant reservations showing a slowdown from earlier in the month.
A Long Year That’s Only Half Over
Though much has already happened in the past six months, an interesting second half of 2020 is anticipated, starting with second quarter earnings. While everyone is expecting a deep drop for most companies, investors will be more focused on improvement in the second half of the year. This may prove to be elusive, as many corporations suspended formal earnings and revenue guidance in the first quarter. Even so, any bit of direction from managements will be welcomed by Wall Street.
It is encouraging to see cities such as New York and Boston who were hit earlier by Covid-19, keep the pandemic under control while slowly opening up their economies. Right now, it is very important to limit the spread of the disease in new trouble spots emerging in the South and Southwest so that hospitals will not be overwhelmed. Some partial restrictions, including the closing of retail stores, bars and workout gyms, have already been reintroduced. A total shutdown, however, is unlikely. The progression of the virus in these areas will have to be closely monitored in the next few weeks.
The major factor in the Covid-19 crisis is the development of a successful vaccine, which is being pursued aggressively by a number of companies using different medical approaches. Fast tracking this will maximize the chances of a cure within a shorter than normal timeframe.
The possibility of another round of stimulus by Congress is also a major factor. There seems to be a consensus among Republicans and Democrats regarding the need for more government help for the economy, but the amount and composition of the program hasn’t yet been agreed upon. Some items for discussion include more another round of direct payments to households, augmented unemployment benefits, a more targeted form of the Payment Protection Program for small businesses, more aid to state and local governments, and limited liability for businesses from Covid-19 related lawsuits. Although Administration and Congressional officials are optimistic about a deal by the end of July, a failure or lengthy delay in passage could jeopardize the nascent economic recovery.
Finally, the November elections are looming on the horizon. At the present time, former Vice President Biden leads President Trump in the polls, with the possibility of the Senate also changing hands and going to the Democrats. There is much debate about what that may mean for the markets and economic policy. But four months is an eternity in today’s political scene and much can happen between now and then.
This year may also see a delay in the posting of election returns due to the pandemic and social distancing, with many states and localities suspending in-person voting and opting exclusively for mail-in or other forms of balloting.
We are cautiously optimistic about the economic recovery and the markets. Though much is dependent on the containment of Covid-19, massive additional stimulus assistance by the Fed and hopefully the Federal government, should continue to provide a safety net for the economy. Keep in mind that we know more about Covid-19 and its characteristics than we did in February, and that may help to eventually control its spread until a vaccine is found.
After a sharp rebound that started to look like a “V” shaped expansion, we see a more gradual path upward with some choppiness going forward, a shape somewhat resembling a reverse square root (or reverse radical, for all you mathematicians).
We continue a modest tilt toward equities with low yields making fixed income less appealing, and favor gold as an alternative asset. We still see a return to new highs for stocks over time, though progress may be uneven.
The views contained herein are those of The Rice Partnership, LLC, and should not be taken as financial advice or a recommendation to buy or sell any security. Any forecasts, figures, or opinions or investment techniques and strategies described are intended for informational purposes only. They are based on certain assumptions and current market conditions and are subject to change without prior notice. This material does not take into account the particular investment objectives, financial situations, or needs of individual investors and should not be relied upon to evaluate the merits of investing in any security. Investors should ensure that they obtain all current available information before making any investment. Investors should also make an independent assessment of the relevant legal, regulatory, tax, credit, and accounting considerations and determine, together with their own professional advisers, if investing is suitable to their personal financial goals. Past performance is not indicative of future results.
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