What’s Going On with the Stock Market???

June 1, 2020

     The stock market is pricing in anticipation of where the economy will be 12-24 months from now.  The current optimism trend is driving the momentum in the markets without regard for the current economic reality.  It is important to note that the international markets, small caps and fixed income strategies have not rebounded as sharply as Large Cap U.S. equities.

     A path forward is to seek return opportunities while remaining cautious related to the potential for market pullbacks based on economic realities.  Market pricing at the present time is considering a best case scenario for recovery.   Normalizing the risk profile range is for a time when more unknowns become known.  Unknowns are actual corporate earnings, actual GDP specifically Q2, actual unemployment specifically Q2 and how effectively the consumer re-engages spending.

Ripple Effects

     While you may assume that the economy is on the road to recovery with these recent upswings, the stock market may not be the best gauge for the overall economic well-being of the U.S. Investors need to be looking at the whole economy, not just the market, and paying more attention to the potential cascading impacts of the coronavirus pandemic.  Liz Ann Sonders, Schwab’s chief investment strategist, warns that “we haven’t done enough thinking about the ripple effects”.

     It seems the market reflects the optimism around a potential COVID-19 vaccine and states reopening. While both are important aspects to follow, they do not tell the whole story of what the country is facing. The stock market is not a direct representation of the economy. The two are actually very different.  Stocks tend to be forward-looking and their ups and downs don’t always take into account all of the aspects that make up the economy.

     The economy encompasses the total goods and services a country produces across all industries, professions and income levels. But indices like the S&P 500 only track the business prospects of large companies. Small businesses will certainly see the immediate impact of the crisis and possibly the largest impact.

Ripple Effects to Watch:

1. Bankruptcies – In the event of an actual bankruptcy, many of those perceived temporary job losses become permanent layoffs. In fact, several major retailers, such as J. Crew, J.C. Penney and Neiman Marcus, have already filed for bankruptcy.
2. The impact of distance learning on college towns. Some universities have already announced they will not reopen for in-person classes in the fall. That’s likely to have a big impact not only on schools, but also the surrounding communities. Many schools employ thousands and inject massive amounts of income into the local economy.
3. Mass unemployment that has accompanied the coronavirus pandemic has been compounded by people who don’t want to come back to work. Nearly 40 million people have submitted unemployment claims since the coronavirus was declared a pandemic in mid-March, and more than 25 million have been receiving benefits for at least two weeks, according to the Labor Department. With the unemployment rate through April at a post-World War II record 14.7% and 20.5 million layoffs during the month, workers are reluctant to head back to their jobs for a number of reasons including workers’ health concerns, limited access to childcare and generous unemployment benefits.

Major technical accomplishment for the market -Reclaiming the 200-day moving average.

     The 200-day is simply the average of the closing prices for the last 200 days for an index or individual stock. In the case of the S&P 500, some investors view the 200-day as a line in the sand, where they will go long above that level but not below it. Achieving this technical level can generate interest in the market and help pull it higher.

     In order to have a sustained rally, you need broader participation. The rotation we’re seeing is a rotation to small caps which is a critical component to define a sustainable rally.  This rally gained strength late last week and has continued to build.  For an investment manager, it was critical to see money flowing into the small caps, mid-caps, and beat up sectors like the banks.  You cannot have a sustainable rally based solely on a few mega cap tech companies.

Common questions

Should I go to the beach? What about the hair salon? A sit-down restaurant meal? Visit Dad on Father’s Day?  Should I go to church?

Reopening is not back to normal.

     It is trying to find ways to allow people to get back out to do things they want to do and business to do business.Bottom of Form  So far, state rules vary, but they involve a basic theme.  They are making assumptions that people will use common sense and good public health practice when they go out. This should go without saying.  Please use common sense and good health practices.

     People with underlying health conditions or compromised immune systems should continue staying home. Folks who are at higher risk of having a more severe reaction have to continue to be very careful and limit contact with other people.

     We need a little more time to fully understand COVID-19 and more time to ramp up our testing, find treatments and hopefully a vaccine.

     We all have social distancing fatigue. Find ways to minister and serve others during this time.  Be respectful of others and their views.  Encourage one another.  In this time of distancing, a true sense of loneliness can set in.  Make the extra effort to check on those in your circle. Connect with others stands on the foundation of respect.  Let’s all stay focused and be a positive light in a very complicated world.

Bobby Lumpkin
Managing Partner, Capital Investment Services

Founder, investingsimply
Financial Advisor, RJFS

Capital Investment Services, LLC & investinsimply are not registered broker/dealers, and are independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc. Securities are offered through Raymond James Financial Services, Inc. Member FINRA/SIPC.

This material is being provided for information purposes only. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Opinions expressed are those of Bobby Lumpkin and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee these statements, opinions, trends, or forecasts provided herein will prove to be correct. Investing involves risk and may occur a profit or loss regardless of strategy selected, including diversification and asset allocation. Holding stocks for the long-term does not insure a profitable outcome. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. The Russell 2000 Index measures the performance of the 2,000 smallest stock companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. Investing in small cap stocks generally involves greater risks, therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Prior to making an investment decision, please consult with your financial advisor about your individual situation.