4/22/2020 Market and Economic Update

Danielle Bonilla |
Categories

There is a growing sense we are close to passing the peak of this pandemic as new recorded cases slow in many areas, and governments begin to strategize on how best to reopen their economies.  While we may be a few weeks away from taking these first steps, it is encouraging to begin planning our efforts to emerge from this crisis.

 

Financial markets have quickly reflected the positive sentiment as stocks recorded the best 2-week performance since the 1930’s.  The S&P 500 Index is up over 28% from the recent lows reached last month, painting a much different picture than what we find populating economic statistics.  It is often the case to find economic statistics in opposition to the direction of stock prices.  The simple answer is that many economic statistics are backward-looking, and the stock market tends to look forward to future earnings potential.  We expect the next few months of economic and corporate earnings data to look unsavory at best.  Fortunately, we believe much of this negative news has already been priced into the stock market.   

 

A close up of a map

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Source:  Morningstar

 

 

We are hopeful for further progress in the fight against COVID-19 which might lead to continued recovery in stock prices.  Assuming the pandemic is well contained by the end of May, our base case calls for a mild recession this year, with 2 quarters of economic contraction before the economy begins to grow again sometime in the fourth quarter. 

 

Figure 1 shows our base case for a global U-shaped recovery, with a sharp decline in GDP due to virus containment measures in Q1, followed by a bottom in Q2 and Q3 as virus cases peak, and then a  recovery in Q4 as stimulus policies take hold, vaccines appear on the horizon and economic activity resumes.

 

Some segments of our economy will be challenged for many months or even years due to this pandemic.  These changes will take some time for our economy to digest, and for companies and employees to shift toward the new operating reality.  As has been the case during past economic contractions, it is likely some companies will come out stronger, and more operationally efficient, than when they entered, resulting in larger profit margins once economic levels return to previous levels.  We are continuously on the lookout to identify companies and industries which have the financial strength to both weather this storm and show strength on the other side. 

 

Since we have yet to discover the true extent of economic damage caused by this disruption, we remain confident an investor’s strategy, as well as their mindset, should account for higher than normal volatility for the remainder of this year.  There are likely to be days ahead that are filled with relief and optimism, as well as days of heartache and setbacks.  Now more than ever it is crucial to have a high degree of conviction surrounding your financial plan and the management of your assets.  We are humbled and grateful that you have trusted our team to help you see beyond COVID-19 and remain available to you via phone or zoom.

 

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The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to affect some of the strategies. Investing involves risks including possible loss of principal.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Internationally investing involves special risks such as currency fluctuation and political instability and may not be suited for all investors. These risks are often heightened for investments in emerging markets.