2020 is an election year, and as we get closer to November, we expect this to replace COVID-19 and the recession at the top of investors’ minds. The makeup of Congress may influence stock market performance, and how stocks and the economy perform prior to the election may forecast who will win.
Stocks staged perhaps the strongest rally in history—a more than 44% gain for the S&P 500 Index from March 23 through June 8—before pulling back about 6% late last week. With so much economic healing ahead of us and a still-uncertain path for COVID-19, the key question for investors is whether stocks are pricing in an overly optimistic scenario for the recovery in economic activity and corporate profits.
The strongest 50-day rally in the S&P 500 Index in over 70 years has sent a signal that the economic recovery is gaining steam and may look more like a “V” than a “U,” a square root, checkmark, or swoosh. We assess the probabilities of these various scenarios for recovery and reiterate our 2020 economic growth forecasts.
The rally continued as the S&P 500 Index closed out May on the positive side. The disconnect between stocks and the economy generated widespread concern among some investors. At the same time, reopening optimism and massive stimulus overshadowed some concerns about a second wave of COVID-19 infections and increasing US-China tensions.
First quarter earnings season offered something for everyone. On the positive side, corporate America produced solid results outside of the COVID-19 pandemic trouble spots, which included retailers, travelrelated businesses, and banks. At the same time, 2020 earnings estimates have plunged, and a return to “normal” earnings could be two years or more away.
Stocks fell last week, and many blamed the drop on high stock valuations, Federal Reserve Chairman Jerome Powell’s gloomy outlook, and rising US-China tensions. Perhaps investors also are increasingly skeptical about prospects for a smooth V-shaped recovery. Regardless, stocks may have been due for a pullback after gains in late March through April and could potentially have further to fall.
Stocks have had a historic run amid increasingly negative headlines. Historically, stocks have tended to lead the economy, and while a second-half rebound may be likely, some equity weakness over the coming months is also possible. The historically worst six months of the year have officially started, and combined with technical warnings, that suggests stocks may take a well-deserved break soon.
This earnings season will be unlike any other, as travel restrictions and lockdowns related to COVID-19 have impacted results dramatically.The biggest economic hits came in mid-March, however, and won’t be fully captured in first quarter results. This makes company guidance particularly important as market participants look for clues into what earnings may look like for the rest of the year.
The economy has halted for the past several weeks, and with it the longest economic expansion ever has ended, meaning we are now in a recession. What makes this recession unique is the government intentionally brought it on, with the chances for an economic bounce back later this year high if the virus is contained. If this recession becomes one of the shortest on record, as we expect, stocks may enjoy better times ahead, as stocks historically have led the economy out of recessions.
Stocks soared last week, working off historically oversold levels. Although the impact to our economy and American workers has been devastating, we did see some positive developments from monetary and fiscal stimulus, which could set up a powerful eventual economic rebound. This week, we share an update on our Road to Recovery Playbook, as we have seen more signs of a major low in equities. We have upgraded our equities recommendation to overweight from market weight where appropriate.