Market Update: May 2020

June 08, 2020
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Say It Isn’t So

Since hitting lows in mid-March, most stock markets around the world have regained over half of what they lost from their peak in mid-February. This sharp rebound has led many people to wonder why the markets have come back so far, so fast, given the severity of the economic fallout taking place in the real economy.

But, before we dive into what we believe is driving the sustained rally from the low, we wanted to produce an update surrounding the initial reopening of the economy.

A full recovery from the COVID-19 shutdown is going to take a long time. Brian Wesbury, Chief Economist at First Trust, estimates that the United States won’t reach a new peak for real GDP until the end of 2021 and does not anticipate a 4% unemployment rate until 2024.

However, there are growing amounts of evidence that the economy may have hit bottom in May. The read across the data sources continues to describe a landscape we’re familiar with: lots of eCommerce deliveries, streaming media, and video chats taking place of concerts, travel, and time at the office. While this picture remains one sided (tilted towards stay-at-home segments), back-to-business segments seem to be rebounding a little bit as well.

For instance, lodging and hotel businesses have continued to recover from the bottom, as hotels have reported solid trends from Daytona Beach, FL to the Lake of the Ozarks, MO to Huntington Beach, CA. Similarly, according to Goldman Sachs research, regional casinos that have reopened have been seeing strong pent-up demand as lines have formed in markets spanning Arizona, Louisiana and Mississippi.

With some signs of a bottoming in economic data, how has the market fared? Illustrated below is a chart highlighting the total return of each sector in the S&P 500 from the peak back in February to the low in mid-March and from the low to the end of May. 

Source: Bloomberg; Nova R Wealth

While these few months have felt like years, it is quite fascinating the short amount of time it has taken for most sectors and the market to recover. In the past, there have been times where this hasn’t been the case (Tech Bubble and Global Financial Crisis), but there have also been times where this has been the case (1987 Crash). More importantly, big losses are hard to recoup. The math of percentages shows that as losses get larger, the return necessary to recover to break-even increases at a much faster rate.

A loss of just 10 percent necessitates an 11 percent gain to recover. Increase that loss to 50 percent and it takes a 100 percent gain to recover. Increase that loss even further to 80 percent and it requires a 500 percent return to get back to where the investment value started! This is why we believe the right investment strategy is one that you believe is robust enough to stick with no matter what direction the market takes in the short term.

So, why has the market come roaring back so far, so fast, given the economic fallout?

1. The amount of fiscal and monetary stimulus the U.S., Europe, and other governments around the globe have provided has been nothing short of extraordinary. Federal acts to offset the impact of the virus in the United States has amounted to the tune of $2.4 trillion, or 11.8% of GDP1. The announcements for more stimulus continue to roll in, and the aim of these measures is to provide assistance to help companies, employed/unemployed, and lending facilities to weather the storm. This has kept investor optimism about a recovery afloat. 

2. Markets are forward looking. When accessing individual companies, investors look at future earnings driven by not only current investments, but future investments as well. Due to the current investments and prospective future investment taking place, there can be a lot of value for those willing to hold on until the recovery has run its course. As businesses continue to open and economic data bottoms, the picture looks a whole lot brighter than it did in mid-March.

In summary, it is hard to predict whether markets have gotten ahead of themselves or are still not high enough to reflect improved prospects for the economy. Only in hindsight will the answer present itself. The best route forward is to stick with an investment plan you are comfortable with, rebalancing to keep your risk tolerance in-line, and tax loss harvesting where it makes sense.


1 Source: CBO; JPMorgan Asset Management – Guide to the Markets

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