Second Half Outlook 2020
Updated: Jul 14
2020 has been a year unlike any we've ever seen. The COVID-19 pandemic combined with the political and social unrest of late have sent the markets on a roller coaster ride that comes with a lot of uncertainty. Our team of financial experts has been hard at work trying to make sense of all this, and adjusting their strategies accordingly. Please continue reading to hear their complete analysis and recommendations through the first two quarters of 2020.
"In short, we believe things will get back to normal in due time, but we expect more turbulence as we work through this historic pandemic."
These are strange times indeed. The first half of the year has been marked by unprecedented economic uncertainty created by COVID-19, rising political tensions, a global oil price war, and an uprising in protest to racial injustices. Not to mention it's an election year, with its own uncertain outcomes. The financial markets are clearly in a tug of war. The bearish case centers around restarting our economy as we face a surge in new COVID-19 infections, with potentially more outbreaks in the fall. The bullish case focuses on the federal government's swift actions to add massive amounts of monetary and fiscal stimulus to our economy, and the view that the worst is behind us. In two emergency meetings the Federal Reserve cut interest rates to zero, reinitiated Quantitative Easing (QE) by committing to buy trillions of dollars in bonds and provide another trillion in loans to businesses and local governments. In addition, Congress passed emergency fiscal stimulus; the CARES Act, pumping over $2 trillion into the economy, with likely more to come.
This tug of war has resulted in the S&P 500 recording the fastest bear market decline (20% drop or more) and the fastest bear market recovery in modern history.
The US stock market (as measured by the S&P 500) has recovered almost completely from the lows reached in March, while most foreign markets have lagged. The market is forward looking, and is currently pricing in a fairly robust recovery. For now we remain cautious, many questions about COVID-19 linger, and there is unusual uncertainty regarding how businesses and consumer will react to the changing economic landscape.
Thus far in July, the United States is seeing record new COVID-19 cases of over 50,000 a day. Yet equity investors have taken this all in-stride as the S&P 500 nears all-time highs. This may seem odd to most, given there are still 19.3 million people out of work and an unemployment rate that is the highest it has been since the 1940's. However, the markets are signaling that there must be better days ahead.
The bond market is also forward looking, but the consensus view regarding the recovery is more mixed as compared to the equity markets. We believe the Federal Reserve will keep interest rates near zero for another year or longer, and has proven to be deeply committed to providing ample liquidity for the bond market. For these reasons we don't anticipate significant price volatility in our core bonds in the near term.
Unfortunately, the duration of this recession will ultimately be determined by our ability to control the virus. Every day we are getting a step closer to a medical solution to stop the spread or a treatment that will lower the mortality rate. This is what gives us hope.
The good news - researchers around the world are developing more than 160 vaccines against COVID, and 21 are currently in human trials. Vaccines typically require years of research before reaching clinical trials, but scientists are racing to produce one by next year. Many are running simultaneous trials (Phase I and Phase II at the same time). Note - the one approval (Ad5) is for the Chinese military and has limited data available at this time.
More good news - there are also numerous antivirals that are in trial phases as well. Antiviral drugs work by stopping the virus from replicating or infecting cells. They can include everything from complex biotechnology therapies to older generic drugs. The FDA under emergency authorization cleared Remdesivir for hospitalized COVID patients. Remdesivir was initially developed for Hepatitis C and later repurposed for EBOLA.
The bad news - the number of cases seems to be spiking again, and this doesn't include any spread associated with the July 4th holiday. The chart below represents the daily new confirmed cases in the U.S. using a rolling seven-day average.
Currently we are in a sweet spot for economic data, where sequentially improving data supports the hopes of a faster global recovery. But there are longer-term issues that extend beyond the next few months of economic and COVID data. To name a few, we see increased stress on households due to a delayed return to full employment, economically motivated reopenings that fail to restore confidence in people still shaken from the pandemic, and the uncertainties surrounding the timeframe for a vaccine and/or antivirals. In short, we believe things will get back to normal in due time, but we expect more turbulence as we work through this historic pandemic. In the meantime, we continue to focus on the core tenets of our investment process - long-term risk adjusted returns and constructing durable diversified portfolios.
We thank you for the confidence you have placed with us and we look forward to continuing to serve you during this time of uncertainty. Stay safe! Stay healthy!
- Your ISG Team