Market Currents

• In a dramatic reversal, the rocky start to the year was followed by an impressive rally in the second quarter that was among the best in decades.  Across the board, risk assets rebounded as investors grew increasingly optimistic over prospects for an economic reopening, promising data on COVID-19 vaccines and therapeutics, and an unprecedented level of monetary and fiscal policy support from authorities.

• Stocks Tend to Lead the Economy. This virus-led contraction is very different from past economic slowdowns.  Global economic activity was deliberately frozen through virus containment measures, bringing growth to a virtual standstill.  The initial shock was sudden, and the pullback very deep.  But this is not a slowdown brought by the ebbs and flows of a typical business cycle.  As painful as the sharp economic slowdown is, we believe the market is treating it as a temporary event, and is anticipating a return to normalizing economic activity.

• Economic Data Playing Catch-Up. Even as the shock of COIVD-19 continues to ripple through the economy, recent economic surprises are narrowing the gap between a languishing real economy and a strong equity market.  The labor market is recovering faster than most economists’ expectations as the economy reopens.  Housing has remained surprisingly firm through the crisis.  Manufacturing activity and retail sales are all rebounding from deeply depressed levels.  Aided by stimulus checks and enhanced unemployment benefits, personal income has increased, leading to a surge in U.S. savings rate.  As states move to reopen, we expect to see some level of pent-up consumer demand further boosting the economy.

• “Second Wave”. The success of the economic rebound will hinge on how well COVID-19 is contained.  After months of an aggressive but economically costly shutdown, states across the U.S. have begun to reopen.  Despite early optimism, a sharp rise in new infections in a number of Sun Belt and Western states has become a pressing matter for public health officials.  Already, many jurisdictions have halted or reversed their reopenings, reverting to earlier phases of postponing next steps.

• Policy Intervention. The global policy response to the pandemic has been unprecedented in speed and size.  The policy intervention was essential in cushioning the impact of the virus shock, and without question a big positive for risk assets.  Central banks globally have made clear that they stand willing to use their full firepower to keep government and corporate borrowing costs low.

• Outlook. The reopening of the economy, surging liquidity and hopeful virus treatment/vaccine news have been significant tailwinds behind stocks.  While we believe the appetite for another widespread lockdown is slim, we maintain a watchful eye on new infection trends, and how they may affect the pace of activity restart.  The Presidential race remains a toss-up at this point.  As the election heats up, we continue to monitor the impact results might have on unwinding the current monetary expansion.