Review the latest Weekly Headings from CIO Larry Adam.

Key Takeaways

  • Economic recovery will be a ‘marathon not a sprint’
  • Economic optimism harmed if COVID-19 gets a ‘second wind’
  • Stimulus helped equity market rally take its first ‘steps’

This past Wednesday, over 28,000 runners (my family included!) across the globe participated in Global Running Day. Whether you jog casually or race competitively, running is a great reason to step outside and enjoy some fresh air. There are many miles to a race, but each one begins with a first ‘step.’ Across the nation, states have taken several ‘steps’ to reopen their economies, but there will be many more to take as this economic recovery will be a marathon rather than a sprint. Since it is a forward-looking indicator, the equity market has had more ‘pep in its step.’ This week marked the 50th trading day since its March 23 low, with the S&P 500 rallying ~40% —the best 50 day rally since 1932. While the index has recovered ~85% of its virus-induced losses, there is still distance to go, and if you are like me, the further the race goes, the more challenging it gets and the slower I advance. The big question is how much energy has the equity market expended to get us to this point and where could it go.

  • The Bottom Line | The equity rally has run-up at a near record pace, pricing in an exorbitant amount of good news as outlined below. In previous Weekly Headings (May 1), we outlined catalysts that could propel the S&P 500 above 3,100—which was achieved this week (currently 3,210). As a result, in the near term, the equity market may need to ‘rest’ since valuations have ‘stretched’ to the highest levels since 2001. The next 10% rally will likely be more challenging than the last, and while we remain confident equities have the ‘stamina’ to move higher over the next 12-24 months, they are primed to face volatility in the interim. Our assumption that earnings growth will rebound briskly in 2021 would present summertime pullbacks as buying opportunities.
  • Fiscal Stimulus The Frontrunner | Congress took action ‘right out of the gate’ and, cumulatively, spent over $3.6 trillion dollars to mitigate the negative economic consequences of the lockdown. The ‘quick’ passing of bills helped spark the rally as it reduced the worst-case scenarios for both economic growth and earnings. More fiscal stimulus in the form of state aid, additional direct payments, and possibly an extension of elevated unemployment benefits is already anticipated by the market, so the eventual passage will likely not be an upside catalyst from current levels.