Markets Emerging from COVID-19 Lockdowns

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Marco Fragnito, Managing Principal | Robert R. Fragnito, Chief Operating Officer 

KEY POINTS:

• Despite poor economic data, markets react positively as the US emerges out of lockdowns.
• US-China relations still a catalyst for market volatility.
• The US Federal Reserve will not pursue negative interest rates.

EQUITY MARKET

Equity markets staged a strong rally in April continuing into May. The combination of government stimulus, Federal Reserve activating liquidity programs combined with monetary policy accommodation and optimism over businesses re-opening across the country drove markets higher. Over the last two months the S&P 500 rose 17.58%, the Dow Jones Industrial gained 15.88% while the NASDAQ Composite moved back into the black for the year rising 22.39%, posting a 6.28% gain year-to-date. Further talk of potential COVID-19 vaccines further buoyed investors spirits. 

While the economic data remains poor at best, investors have chosen to focus on the future and see brighter days ahead. We at MCF pose the question, what is the alternative for investors in an environment where 10-year US Treasuries yield a meager .65%?

Earnings for the companies comprising the S&P 500 were on track to fall 7.70%, much better than the expected 17% decline forecast according to Bloomberg, in our view, a key factor in the rebound of equity markets. US-China relations continue to suffer due to the COVID-19 pandemic originating in China, along with continued trade and national security concerns giving the cause for further stock market volatility and muted financial markets to downright gains in May. 

Investors have begun to re-assess their view of US-China trade relations and appear to be discounting more of the same as seen in the last 24 months. We have written over the last few weeks about potential outcomes and continue to evaluate the potential future impact on financial markets. 

FIXED INCOME

The fixed income markets continue to be buoyed by negative economic data, excess liquidity and general investor caution directed towards equity markets. The Federal Reserve remains committed to support all areas of the debt markets. While the pandemic poses downside risks, it is extremely important for investors to note that “Fed Chairman Jerome Powell reiterated that policymakers were open to utilize all tools available but were not considering a negative interest rate policy.” 

The analytical data has shown that negative interest have proven to be detrimental to economic growth where they have been utilized by Central Banks around the world, and we at MCF believe will prove to be extremely so in the US. 

Since the end of 2019 and early 2020 when Federal Reserve monetary policy became accommodative and their actions since, have been instrumental in allowing financial markets to traverse and recover from difficult economic times. So long as monetary policy remains accommodative fixed income market liquidity and stability should continue.

MARKET OUTLOOK

Since our last market commentary, we have moved from feeling optimistic about financial markets to positive. The continued super low interest rate environment continues to make equities attractive over the near and long term. Numerous government stimulus programs appear to be proving to be successful in reducing the negative impact on the economy from the lockdown, and the continued efforts of The Federal Reserve in debt markets have provided the needed support for financial markets.

We continue to stress to clients to stay focused on the long term, our economy was well balanced heading into this health crisis, and we believe will recover robustly once the economy emerges from the lockdown. Markets discount the future and not the present, our study of the historic data continue to point to further gains. For deeper analysis into our thoughts concerning markets, we recommend viewing our April Monthly Market Commentary. We remain committed to have the data lead our actions, not emotions or the financial media and market pundits.

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DISCLAIMERS

The opinions expressed here reflect the judgement of the author(s) as of this date and are subject to change without notice. Information presented here is for informational purposes only and does not intend to make an offer, solicitation, or recommendation for the sale or purchase of any product, security, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here. The information being provided is strictly as a courtesy. 

SOURCES

Wells Fargo Advisors, Jack Kraft, Angela Shin “Monthly Market Commentary,” May 5, 2020. Forbes, Simon Constable “The Unintended Consequences Of Central Bank Policies & Negative Interest Rates,” Jan. 31, 2019. Reuters, “Less than zero? Fed's Powell shows no love for negative rates,” May 13, 2020.