Please note: This update was prepared on Thursday, July 2, 2020, before the market’s close.
A better-than-expected report that the country is getting back to work sent stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. sailing on the last trading day before the long holiday weekend—a positive outcome that contrasts with news of rising COVID-19 infection rates. The jobless rate fell to 11.1% in June from last month’s 13.3% rate as the U.S. regained 4.8 million jobs, exceeding economists’ expectations.
Overall, stocks have rocketed higher from their March lows, with the end of June marking the best calendar quarter for the Dow since 1987. StocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. are still at a loss for 2020, though. Through Wednesday, the Dow Jones Industrial Average and the broader S&P 500 index were down 8.7% and 2.6% for the year, respectively. The MSCI EAFE index, a measure of developed international stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. markets, is down 11.2%. As of Wednesday, the Bloomberg Barclays U.S. Aggregate BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. index’s yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. stood at 1.27%, down from 2.31% at year-end. On a total return basis, the U.S. bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. market has gained 6.1% for the year.
Second Half Outlook: Justifiable Caution
The U.S. economy moved from expansion to recession in just one month. Even if we are already in a “recovery” we think it’s going to take a lot longer to return us to prosperity. That might seem overly pessimistic given that the initial signs of an economic “bounce” off the recession’s bottom can be found in myriad places. But for as many positive signals as the economy is sending, there are an equal number of warning signs.
Consider consumer sentiment and expectations. Both indicators jumped almost 10% in June, a positive sign for the recovery. Yet, they remain more than 20% below their February highs. Unemployment? The four-week moving average of new unemployment claims is down 74% from its mid-April peak—a good thing. But at 2.2 million new claims on average over the same period, we’re running 543% higher than year-ago numbers.
Retail sales soared almost 18% in May—a huge, big-V recovery gain. But compared to May 2019, they’re down 6%. That’s not growth. Manufacturing activity scored a small-v recovery of 1.4% in May but remains 16.5% below year-ago levels. More broadly, the Leading Economic Index, a monthly tell on many factors, jumped 1.4% in May. It’s still off 10.6% from where it stood a year ago.
Add it all up and we still see reasons for caution. The question on many people’s minds, including ours, is, “How can the stock market be rising so quickly when the economic and health data is so lousy?”
Unemployment is high, economic growth is faltering—GDP officially contracted 5% in the first quarter and the numbers are expected to be much, much worse for the quarter just ended—and COVID-19 deaths have surpassed 120,000 in the U.S. alone, with infectious disease expert Dr. Anthony Fauci warning that we could see 100,000 new daily cases if the current surge isn’t wrestled to the ground quickly.
Yet, things got so bullish this past month that the NASDAQ Composite has hit new highs—the latest just yesterday (and, as we write this, it’s poised to hit another record today). At one point, the S&P 500 was just 4.5% off its February peak.
For the second half of 2020, we expect volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. to continue. While stock market optimism appears to have recovered thanks to massive Federal Reserve stimulus and fiscal intervention designed to bridge the gap over the pandemic’s economic valley, only time will tell if that bridge is both sturdy and long enough. Regardless, it’s clear the recovery is not going to be easy, even, certain nor unchallenged…though market gains could be surprisingly sudden.
Don’t get us wrong—in general, we’re optimists. Bull marketsA period during which stock prices rise significantly from recent lows for weeks, months or years. outlast bears. We’ve done the analysis and found that, on average, stocks rise during recessions, though only by a little bit.
Unfortunately, that average gain ignores the fact that markets have risen in only six of the 11 recessions we’ve experienced since 1948. So, with stocks still down slightly for the year, is the market a buy? We think there are still far too many unknowns to make that call.
For example, what is the current earnings outlook for the stocks in the S&P 500?
It’s anybody’s guess. Just this week, The Wall Street Journal reported that executives at 40% of the companies in the index have retracted any forecasting they’ve given on where they expect earnings to go. That’s 200 companies that say they haven’t got a clue. If corporate management doesn’t know what their projected earnings are, how can anyone else?
Don’t get us wrong—in general, we’re optimists. Bull markets outlast bears. We’ve done the analysis and found that, on average, stocks rise during recessions, though only by a little bit.
We acknowledge and expect that there will be opportunities for growth in this volatile market. But with so many big unknowns about the state of the economy—and when and if we’ll see a true end to the pandemic—we’re keeping our champagne on ice for now.
Podcast: DividendA cash payment to investors who own stock in the company. Stocks in a Low-Yield World
Where’s an investor to find strong, battleship-balance-sheet opportunities that generate income in an environment of low interest rates and considerable market volatility?
The managers of Adviser Investments’ Dividend Income strategy recently sat down for a conversation about the current landscape for dividendA cash payment to investors who own stock in the company. investors and what they look for when they’re constructing a portfolio. Join Portfolio Managers Charlie Toole and Steve Johnson and EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Research Analyst Kate Austin for this informative discussion for investors of all stripes.
- Should income-focused investors seek out dividend-paying stocks or bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. when interest rates are low?
- Signals that suggest a company is about to cut its dividend payment
- How do dividendsA cash payment to investors who own stock in the company. provide a window into how well a company is run?
- What sectors should income-focused investors seek out?
- …and much more!
It’s never too soon to get better acquainted with dividend-paying stocks and how they can provide both portfolio offense and defense. Click here to listen now!
Adviser Investments’ Market Takeaways
Calm and clarity have been sorely lacking when it comes to market news recently—that’s why we’ve begun providing Today’s Market Takeaways, short videos in which a member of our investment team analyzes what the market’s telling us.
You can find two new Market Takeaways videos on our website, featuring Kate Austin analyzing the Fed’s recent decision to limit big banks’ stock buybacks and Steve Johnson discussing the data and trends we’re focusing on for the second half of the year.
Next week’s thin slate includes several important reports. We’ll be looking at reads on the manufacturing and services sectors, job openings and jobless claims, consumer credit, inventories and inflation.
As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.
Please note: This update was prepared on Friday, July 2, 2020, before the market’s close.
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