The U.S. entered a recession in late February, ending the longest economic expansion on record.1 As a result of the COVID-19 pandemic, second-quarter gross domestic product (GDP) will likely be the worst quarterly rating since the Great Depression.2
However, the market has been surprisingly resilient with the S&P 500 erasing nearly all of its 2020 losses.3 As we enter the third quarter, we are closely watching several factors that we expect to be primary movers of the market, including the following three themes:
1. Presidential election: Recent events have overshadowed the typical anticipation of a presidential election. Political power could potentially change hands in the Executive Branch, Senate and House of Representatives come November. A shift in power could affect the corporate tax rate, which was lowered from 35% to 21% by the Tax Cuts and Jobs Act in 2017.4 Biden has noted his desire to raise this rate to 28%, which if enacted would almost certainly require a market repricing of future earnings.5 By the end of the third quarter, we will know a lot more about the presidential race and how a potential change in leadership could affect markets.
2. Signs of improving economics: While we won’t see a full economic recovery in the third quarter alone, we will be looking for signs of improvement in unemployment claims and consumer confidence. Unemployment claims are still historically high but are decelerating.6 Consumer confidence has been rising slowly as businesses across the U.S. begin to reopen.7 We should watch for these early signs of recovery to continue.
3. Stabilization of economically-sensitive companies: This recession will help reveal parts of the economy that are not sustainable. Some companies that were in very weak positions before the recession will declare bankruptcy. Other entities will consolidate to survive. While we have already seen a strong recovery in the technology space8, we want to monitor for signs of recovery with more economically-sensitive areas of the market, such as small businesses, financials, consumer discretionary and industrials. Market indicators of support flowing back into these companies is critical given the size of the labor force they employ.
With concerns about a second wave of the coronavirus and other events impacting the economic recovery, we expect market volatility to remain elevated in the near term. If you have any questions about your portfolio, please contact your Exencial advisor.
Sources:
1. The National Bureau of Economic Research (6/8/20) – Determination of the February 2020 peak in US economic activity
2. CNBC.com (5/15/20) – GDP could decline by 42% in the second quarter, according to the Atlanta Fed
3. Yahoo! Finance (data as of 6/22/20) – S&P 500
4. Investopedia (1/20/20) – Explaining the Trump tax reform plan
5. CNBC.com (6/29/20) – Biden tells donors he will end most of Trumps’ tax cuts
6. The Guardian (6/18/20) – US unemployment claims rise by 1.5 million as pandemic pain continues
7. CNBC.com (5/26/20) – Consumer confidence rises unexpectedly in May as economy reopens
8. Reuters (6/5/20) – Tech drives Nasdaq to all-time high as signs of recovery emerge from coronavirus pandemic
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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