Posted July 2, 2020
After surging over 6% in the first week of June on the back of a positive unemployment report, the market reversed its course. Record-setting spikes in COVID-19 infections gave investors pause and reduced June’s gains to a modest 2%. Investments outside the US fared a little better. Emerging market stocks and developed-market international stocks returned about 7% and 3% for the month, respectively.
The question of how to reopen safely without triggering a second wave of virus is a global one. In the US, Texas had to close bars a second time and further restrict restaurant capacity, and many California counties had to pause their reopening schedules after new cases surged. Other countries have also experienced interruptions. China recently quarantined 500,000 residents after a small outbreak in Beijing, and Germany imposed lockdown measures on two small cities in the Eastern part of the country. How do you find the balance between reopening the economy, and preventing COVID-19 infections from overwhelming healthcare systems? For US policy-makers, there may be no static answer.
While June’s volatility was tamer than what investors experienced in March and April, the uncertainty that feeds it remains. The July release of second quarter corporate earnings reports will give us our first full-period look at how companies fared during the economic shutdown. How investors react to these earnings results will be a telling test case. Financial results are expected to be poor, with earnings falling 43%, but so far investors have shrugged off similarly poor macroeconomic data covering the same period. If the attitudes of investors remain the same, information on past results shouldn’t have a material impact on stock prices.
Although the June US jobs report is expected to show continued improvement, there is still a lot of mystery regarding the rest of this year. According to Factset, about one third of the S&P 500 constituents have suspended earnings guidance for 2020. That is a significant number of companies. In our view, the lack of this kind of data will likely leave equity markets volatile and could mean more months like June, where the beginning of the month is different from the ending.
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