This week, The National Bureau of Economic Research confirmed the U.S. entered a recession in late February as a result of the COVID-19 pandemic.1 At the same time, the S&P 500 almost erased all of its 2020 losses and briefly turned positive for the year amid hopes of a swift economic recovery.2
The current economic environment is certainly one for the books. It is possible the U.S. is already out of the recession as gross domestic product (GDP) growth slowly ticks higher with states and businesses reopening.3 This could result in the shortest recession and fastest bull to bear to bull market on record.4
Regardless of how long it will take for the economy to recover, the market will be mostly concerned with how long it will take for earnings to recover. There is no doubt companies’ profitability during the first half of 2020 took a significant hit. Even though shutdowns and event/travel cancellations began with only a few weeks remaining in the first quarter, S&P 500 companies reported about $12 earnings per share compared with $35 earnings per share during the first quarter of 2019.5 We anticipate second-quarter earnings to be very weak as the majority of the shutdowns occurred in April, May and June.
There are still several obstacles in the way of achieving healthy earnings levels. For one, a staggering 40.8 million Americans have filed for unemployment since mid-March.6 Less participation in the workforce will result in lost productivity and ultimately lower revenue for companies. Additionally, it may take a while for consumer confidence and spending to return to levels seen prior to the pandemic.7
There are also many areas of the economy that are quite vulnerable, including financials, energy, industrials and basic materials. Technology, healthcare and communications stocks have tended to fare better, yet even these still rely on households and other companies being financially healthy enough to continue devoting higher spending for their services.8
In the immediate term, the market seems to be expecting poor numbers (witness its very positive reaction to the recent mediocre jobs report) for the second quarter.9 However, it also seems priced for a fairly quick recovery in the third quarter and beyond. A major determinant in gauging the market recovery will be whether third-quarter earnings results show strength.
In light of April and May’s market recovery, it could be time to revisit portfolio allocations, especially for those whose portfolios are underweight to bonds and fixed-income investments, or for those who have excess cash and may be waiting to set up a plan to put that cash to work in markets. Please contact your advisor if you have any questions.
1. NPR – It’s official: U.S. economy is in a recession
2. CNBC.com – S&P 500 erases its loss for the year as stocks rally on reopening optimism
3. CNBC.com – The Covid-19 recession is over,’ says economist Zandi as May job losses not as bad as feared
4. The Balance – History of recessions in the United States
5. S&P Dow Jones Indices – S&P 500 Index Earnings
6. NPR – 40.8 million out of work in the past 10 weeks — 26% of labor force
7. U.S. News & World Report – US consumer confidence shows solid gain in January
8. CNBC.com – Sector watch chart
9. MarketWatch – Dow closes 800 points higher after jobs report shows surprise jump in payrolls, fall in unemployment rate
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
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