Review the latest Weekly Headings by CIO Larry Adam.

Key Takeaways

  • Robust Recovery Is The General ‘School Of Thought’
  • Investors Hope A Second Wave Is ‘The Road Not Taken’
  • Valuations Require Investors To ‘Put Their Thinking Caps On’

Congratulations to the Class of 2020! I must admit, when I pictured my eldest daughter graduating high school, I did not imagine her wearing a mask with her cap and gown while receiving her diploma in my backyard. Although the traditional festivities did not occur, I can say that she, along with all other graduates, are moving onto college or entering the work place with valuable lessons in hand. From adapting to online learning to enduring the uncertainty that life can throw our way, this class has displayed incredible resilience and we wish them the best of luck in their future endeavors. Resiliency also comes to mind when I think of the US equity market. COVID-19 resulted in one of the swiftest declines in history, but the rally has been historic too. Before yesterday’s pullback, the S&P 500 was up ~43% and even briefly turned positive on the year. Due to inflated optimism and the market pricing in an exorbitant amount of positive news, the uptick in volatility had been expected.

  • The Bottom Line | We still believe the future looks bright for equity investors, but ‘great expectations,’ especially pertaining to the successful reopening of the US economy and the eventual development of a vaccine, may be what hampers its near-term performance. The weight of these expectations has caused us to enter a ‘show me’ phase of the market, where both economic growth and earnings are going to have to meet, if not exceed, elevated estimates already priced into the market. Any further disappointments regarding the strength or speed of the recovery could exacerbate interim periods of downside volatility.
  • Rebound Expectations May Be Reaching For The Stars | The equity market is a forward-looking mechanism, anticipating any economic developments or market-moving events that could potentially occur over the next three to six months. Therefore, current equity market levels are in part a reflection of the expectations surrounding the severity and duration of the virus-induced recession and the impending recovery in the second half of this year. As the fears of the virus intensified and states implemented full lockdown restrictions, a significant decline in economic growth became inevitable that led the S&P 500 to decline ~34% to its recent lows on March 23. However, as states appeared to be successfully lifting restrictions, estimates for a vigorous bounce back in economic activity in 2H20 strengthened and buoyed the recent rally. It was revealed this week that the current consensus estimates for third and fourth quarter GDP (~20% and 9%, respectively) are higher than those predicted by the Federal Reserve (Fed). These heightened expectations have put pressure on the US economy to grow significantly faster in order to propel the equity market higher, which is why the threat of a second wave of cases induced Thursday’s sell-off. A quick return to work for the majority of the 44 million workers who filed unemployment claims may help the dream of a remarkable rebound become a reality, but there are still many risks that could prevent it from happening.