U.S. equities have regained strength in recent days, but a rapid economic recovery remains unlikely.
“U.S. equities continued their recent move higher and are now up over 20% off of the lows set on March 23,” Chief Investment Officer Larry Adam said. “If this positive performance holds into market close, it would mark the strongest 12-day rally (+21%) for the S&P 500 since 1938. While this positive bounce is a reflection of the market pricing in positive news over recent days (e.g. potential peak in New York cases, increase in fiscal stimulus), we are not yet out of the woods with respect to the virus given that we do not yet have a vaccine or therapeutic.”
Although the full extent of the economic impact from COVID-19 and social distancing measures remains uncertain, some things appear to be taking shape.
“The near-term economic outlook has begun to coalesce around a sharp downturn in gross domestic product in the second quarter of 2020 – possibly at around a -30% annual rate, maybe more,” Chief Economist Scott Brown said. “The prospects for improvement in the second half of the year are more uncertain, and will depend on whether we can halt the spread of the virus, come up with an effective treatment and begin to unwind social distancing. The economy will recover, but a rapid bounce-back appears unlikely.”
On top of the $2 trillion fiscal stimulus package the U.S. federal government passed recently, Washington Policy Analyst Ed Mills expects additional support for small businesses.
“Concerns over adequate funding for the Small Business Administration’s small business Paycheck Protection Program has accelerated discussions on a new legislative measure that could provide additional funding,” Mills said.
The U.S. Federal Reserve continues to offer support. On Tuesday, the Fed sold $25 billion in 10-year Treasury notes, injecting valuable liquidity into the market, according to Chief Fixed Income Strategist Kevin Giddis.
“Normalcy is simply the proper function of a market, whether it is moving higher or lower in price,” Giddis said. “Liquidity is a key component in a functioning market – can I get in or out of a security when I want to? In the Treasury market, mainly due to the efforts of the Treasury and the Fed, that is occurring.”
Healthcare policy analyst Chris Meekins believes the U.S. has made progress in understanding the severity of the virus: expanded hospital capacity, personal protective equipment for healthcare workers and the unraveling of scientific mysteries. In other areas, however, he sees little progress being made: testing capacity, contract tracing and vaccine solutions.
“We reiterate that reopening our country will require either increasing public comfort with the virus – generally accepting its devastating effects or making testing and treatments readily available – or stopping the spread. Depending on the effectiveness of mitigation efforts and the seasonality of the virus, stopping the spread could drag present conditions out until we turn a corner on Memorial Day at earliest or after Labor Day at latest,” said Meekins.
Until we get more clarity, the financial markets likely will continue to experience volatility.
“Economic challenges and uncertainty still remain high, and we continue to believe the market’s bounce is part of the bottoming process,” said Joey Madere, senior portfolio strategist for the Equity Portfolio & Technical Strategy group. “We would use pullbacks as opportunities for long-term investors to continue accumulating during the current bear market.”
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Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of Raymond James and are subject to change. There is no assurance that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Past performance may not be indicative of future results. The S&P 500 is an unmanaged index of 500 widely held stocks. An investment cannot be made in this index. The performance noted does not include fees or charges, which would reduce an investor's returns.