State of the Economy and Markets
Quarter 2, 2020
I hope all is well with you and those closest to you. COVID-19 has affected everyone, and far too many lives have been lost. Government-mandated shutdown measures that have kept businesses closed and people at home are gradually being eased across the country. However, a number of states have seen confirmed cases increase quite rapidly since doing so, bringing into question just how likely it is that a full reopening of the economy can be successful at this time. The success of the reopening process and increased consumer confidence are paramount to how quickly we can recover from the tremendous turmoil caused by this pandemic. Regardless of the outcome, a return to normal social and economic activity does not seem imminent. No one knows what the second half of 2020 and beyond will look like, but we have been faced with challenges and uncertainty before and always emerged stronger and more prepared for the future as a result. I trust this time will be more of the same.
The recession, our first in nearly 11 years, caused by COVID-19, is the sharpest downturn in the U.S. economy since the Great Depression. It is likely that the U.S. economy has already started to recover from the April lows as economic activity is improving and unemployment levels are beginning to trend downward. While a moderate recovery is expected during the second half of 2020 and into 2021, a full recovery will likely take months, perhaps even years.
Not to be outdone by the economic downturn, the S&P 500 Index dropped an unprecedented 32% in just 23 trading days. However, almost as quickly as it dropped, the stock market has rallied in historic fashion as all three major U.S. stock indexes (Dow Jones, S&P 500 and Nasdaq) have increased more than 40% from their March lows. Investors have grown increasingly optimistic about the economic recovery and hopes for continued government provided support and stimulus. A modest economic recovery and low interest rates should help support equity valuations for the near-term.
Where we go from here depends largely on the success of containing the virus (and ultimately finding a vaccine), the effectiveness of current and future stimulus packages and potential changes in consumer and corporate behaviors. A return to pre-recession GDP and 4% unemployment is not likely in the near-term, and the road to full recovery more bumpy than smooth. Corporate profits will be down substantially but are expected to recover beginning as soon as the third quarter of this year. As they almost always do, the stock markets typically begin looking ahead long before the current news would indicate things are getting better. There is no better example of this than the weeks following the March declines. Optimism was running high, and, while we are thankful for that, we are also being cautious and constantly reminding ourselves that there are plenty of hurdles ahead, both from the healthcare side and the economic. Investors will be looking for guidance in the near-term and answers to whether we will see signs of recovery or those of a potential setback.
When I prepared my last market and economic commentary, I reiterated our belief that staying the course and maintaining a proper asset allocation is the key to investment success and I do that once again here. Reacting to the short-term news and swings of the stock markets can prove harmful to the long-term success of a well-designed investment plan. Those who showed patience during March were rewarded with the gains of April and May.
Your relationship team is here to meet with you in person, over the telephone at (518) 584-5844, or even via video conferencing if you would prefer. We value your relationship and the confidence you have placed in Adirondack Wealth Management by choosing us as your financial partner. We know these are very difficult and trying times and we wish you and your family the very best. Stay positive and stay healthy!
Sincerely,
Michael Brodt
Senior Vice President
Wealth Management Director