posted by: Radnor Financial Advisors
Following the market close on June 8th, stocks are now back to the levels at the start of the year. After falling about 35% from its February high to its March 23rd low, the S&P 500 had rallied all the way back, a remarkable achievement given the continued level of uncertainty surrounding both the coronavirus and the economy. In the span of four months, the US has encountered events that resemble a number of very difficult periods in our history: a pandemic, Great Depression-like unemployment, civil unrest, and a bear market. None of this was expected as we entered the year and perhaps helps explain why the past four months have felt like years.
You may find it difficult to reconcile the strong equity market gains with the weak economic environment. Financial markets are forward-looking. With many states starting to re-open, investors are focused on the resumption of economic activity. Markets are also reacting to the monetary and fiscal policy response globally, which has been significant, quick and supportive of the economy. In addition, stabilization of markets (especially in fixed income) and optimism on the medical front have buoyed investor confidence.
Going forward, economic challenges will persist even if Covid-19 remains under control. Allowing businesses to re-open and employees to go back to work doesn’t mean they will. Similarly, allowing restaurants and other entertainment venues to re-open doesn’t mean consumers will return immediately. Elevated public debt levels and expanded central balance sheets will need to be dealt with. In the near-term, there may be a move away from globalization as well as a more polarized economic and political atmosphere. The future holds an uncertain economic outcome, with growth likely slightly lower given the massive fiscal and monetary stimulus pulling demand forward.
So as a new month starts, states start the process of re-opening, and equity markets start with a clean slate, investors should not get complacent following the recent market gains. A high level of uncertainty remains, and thus it is important to remain diversified, be patient, and ignore short-term market noise.