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Markets Volatile on News of Second Wave Thumbnail

Markets Volatile on News of Second Wave


As 21 states see upticks in COVID-19 cases and hospitalizations, the economic outlook is uncertain at best. These talking points highlight the key developments that may spike client concerns.

“The extent of the downturn and the pace of recovery remains extraordinarily uncertain and will depend in large part on our success in containing the virus.”

—Jerome Powell, Federal Reserve, June 10, 2020

“For now, traders are betting the wisdom of the crowd supersedes bankruptcy law, arithmetic, and the efficient-markets hypothesis.”

—Charley Grant, Wall Street Journal, June 9, 2020

Key takeaways

  • At 1,900 points lost, Thursday’s DJIA drop was its fourth biggest ever. This was due to weak Fed outlook and regional coronavirus surges triggering fears of a second wave.
  • Coronavirus cases and hospitalizations are rising in 21 states.
  • U.S. Treasury Secretary Steven Mnuchin says we cannot shut down the economy again because “we’ve learned that if you shut down the economy, you’re going to create more damage.”
  • The combined weighting of Apple, Microsoft, Amazon, Google and Facebook now makes up 20% of the S&P 500, up from 11.6% in 2013.
  • A recession is officially here, ending 128 consecutive months of economic growth—a remarkable expansion of 10 years versus the average post-recession expansion of five years.
  • The Fed expects the unemployment rate will end 2020 at 9.3%, down from 13.3%. Additionally, the Fed thinks it will remain elevated for years, coming in at 5.5% at the end of 2022 and only falling to 4.1% (near pre-coronavirus levels) in the long term. “It’s a long road” commented Fed Chief Jerome Powell.
  • Near-zero interest rates are expected through the end of 2022 and will be maintained until the Fed is confident of a recovery. Fifteen (of 17) Fed policy committee participants do not see an interest rate hike until 2023 at the earliest.

Regional spikes spark talk of second wave, Powell testifies, and markets respond with major volatility

U.S. Stock Market Data
6/5/2020 CloseWeekYTD1-year
S&P 5003,041.31+4.78%-5.86%+5.35%
NASDAQ9,588.81-2.30%+6.87%+22.99%
DIJA25,605.54-5.55%-10.28%-1.86%

Source: CNN Business

Market update

  • Year-to-date, the S&P 500 is -5.86%, the Nasdaq is +6.87%, and the DJIA is -1.86%.
  • Stocks tanked on Thursday, June 11, 2020. The DJIA shed -1861.82 points (-6.90%), the Nasdaq lost -527.91 points (-5.27%), and the S&P 500 lost -188.04 points (-5.89%). The Energy sector led the losses, losing -9.45% on the day.
  • The VIX volatility index, which measures the implied volatility of the “at the money” strike prices on the S&P 500, rallied 49% on Thursday, June 11, 2020. It closed above 41 for the first time since mid-April as put sellers were taken to the cleaners.
  • Goldman Sachs attributes last week’s volatility to a function of (1) near-term profit taking, (2) not having conquered COVID-19 yet, and (3) the risk of resurgence of the virus due to the reopening of the economy.

COVID-19 Index June 15, 2020

Source: Taylor Financial Group

Click here to view or download a larger pdf of this week’s COVID-19 Index.

COVID-19—second wave?

While some states are experiencing a dramatic spike in cases of coronavirus, the truth is that the U.S. is not so much seeing a second wave as continuing to ride out the first wave of the pandemic, reports NPR. The image below illustrates, with data from Johns Hopkins.

Source: Center for Systems Science and Engineering at Johns Hopkins University (through June 11). Credit: Alyson Hurt/NPR

The U.S. is currently at a viral “reproduction rate” of 1—so, each infected person passes the virus to one other person. “If things stay basically status quo and we continue doing what we’re doing, we’re going to continue seeing 25,000 to 30,000 additional deaths a month for the foreseeable future,” says Dr. Ashish Jha, a professor of global health at Harvard University.

Coronavirus cases and hospitalizations are, indeed, rising in 21 states:

  • Arizona, California, Florida and Texas are seeing the strongest spikes in new COVID-19 patients and hospitalizations.
  • Texas reported its highest number of new cases, 2,504, in a single day on Wednesday.
  • In California, hospitalizations are at their highest in almost a month.
  • Florida reported its highest number of new cases over a weeklong period, with 8,533 new diagnoses.
  • Arizona hospitals are putting in place emergency plans to increase bed capacity.

A true “second wave” is something epidemiologists expect in the fall, when decreasing temperature and weather conditions are more favorable to all coronaviruses, says Marc Lipsitch, DPhil, a professor of epidemiology at the Harvard T.H. Chan School of Public Health and director of the Center for Communicable Disease Dynamics.

What’s going on in the economy right now?

  • A recession is officially here, ending the streak of 128 months in a row without one. Nominal GDP grew 50% during that time—about average for previous expansions—but the typical expansion lasts just five years. This one lasted 10.
  • Global economic contraction:
    • The World Bank says that the COVID-19 pandemic will shrink global GDP by -5.2% in 2020—the worst decline since World War II and nearly three times as steep as the 2009 global recession.
    • The Organization for Economic Cooperation and Development expects the global economy to contract by 6%—if there is not a second wave.
    • The Wall Street Journal reported that if a second wave of coronavirus emerges, the global economy would shrink by -7.6% this year.
  • This week, the ECRI increased to -14.88% from -16.69%. The ECRI indicates turning points in the economy and is still currently near its lowest reading in history. Although it has trended positive for the past four weeks, it has yet to convincingly recover from its drop.
  • The University of Michigan’s preliminary index of May consumer sentiment increased to 78.9, topping forecasts for 75.0 and a final April reading of 72.3. While sentiment improved for a second month in a row amid renewed gains in employment, survey respondents also remain fearful over a resurgence in COVID-19 cases.
  • Import prices rose 1% last month, the largest increase since February 2019, following a 2.6% April decline. The May increase was led by rising fuel costs.
  • Export prices rose 0.5% in May, following a 3.3% drop the month prior. Prices for U.S. imports and exports are both still down 6% from a year ago.

Unemployment

  • The May unemployment rate dropped to 13.3% from 14.9%, but was affected by a misclassification error. Starting in March 2020, official unemployment data was subject to an error that saw people misclassified as “employed but not at work” instead of “unemployed on temporary layoff.” Without this error, the unemployment rate is estimated to be around 16%–17%.
  • New first-time filings for unemployment benefits totaled 1.542 million last week, fewer than projected and down from the 1.897 million the prior week.
  • Continuing jobless claims declined week-over-week, totaling 20.9 million. The four-week average declined a second week to 22 million.
  • More than 44 million Americans have filed for unemployment benefits in the past three months.
  • The extra $600 in weekly unemployment benefits ends July 31, 2020. Several states have applied to extend that deadline.

Bullish thinking

  • J.P. Morgan sees a need for (1) income, (2) growth, and (3) diversification within portfolios right now. According to Dr. David Kelly, Chief Global Strategist and Head of the Global Market Insights Strategy Team for J.P. Morgan Asset Management, they believe that there will be a better entry point for the market in the next few months.
  • Investor Jeff Gundlach, founder of DoubleLine Capital, said he is bullish on gold and expects the commodity to reach new highs, adding that he would stick to his weak-dollar outlook as he anticipates U.S. money may devalue against most other currencies.
  • Goldman Sachs believes that more upside to this market is possible. They think that since the labor market continues to steadily improve, absolute level of all-time high stock valuations can potentially be sustained.
  • Goldman Sachs also believes that being committed to specific stocks that are “poised to thrive going forward” could help investors position their portfolios.
  • Moderna, a biotech startup, says it will begin a pivotal trial of its candidate vaccine against COVID-19 in July. On Thursday, June 11, 2020, the company announced that it hopes to enroll 30,000 volunteers for their researchers.

Bearish thinking

  • Kelly of J.P. Morgan says he is “skeptical” of the assumed “V” shaped earnings season. He and his team think it could take up to three years for earnings to recover. Ultimately, Kelly thinks that this equity rally has been driven by the perceived slowdown of COVID-19 and positive economic policy response.
  • The World Bank says that the COVID-19 pandemic will shrink global GDP by -5.2% in 2020. This would be the worst decline since World War II and nearly three times as steep as the 2009 global recession.
  • J.P. Morgan’s timeframe for a vaccine is in Q2 of 2021, and some are saying by the end of this year, ranging all the way to the end of next year.
  • Gundlach believes that Fed measures such as quantitative easing and zero rates are “ineffective,” while negative rates are the biggest kryptonite to the banking system.
  • Gundlach also believes that the boom has been driven by what he refers to as the “Super 6:” Facebook, Amazon, Apple, Google, Netflix, and Microsoft. Aside from that, he believes the market has been mainly driven by “retail investors.”

Debra Taylor, CPA/PFS, JD, CDFA, is the principal and founder of Taylor Financial Group, LLC, a wealth management firm in Franklin Lakes, N.J. Debra has won many industry honors and is the author of My Journey to $1 Million: The Systems and Processes to Get You There, a book about industry best practices. She is also a co-creator of the Savvy Tax Planning program.