2Q Market Recap: Shoot First, Ask Questions Later

One of the toughest challenges right now is coming up with a logical explanation for how it is possible markets are sitting near all-time highs, in contrast with everything that’s going on in the world.  At face value, it doesn’t seem to make much sense.  On one hand, you have a sharp rebound in stock prices, while on the other, you have a worldwide health crisis, record levels of unemployment, and an uncertain path to economic recovery.  Trying to account for the many different factors contributing to this scenario would make anyone’s head spin.  However, there are some broader, high-level themes that can help get us closer to making some sense of this.  The first, and arguably most influential, of these being monetary stimulus (i.e., the Federal Reserve’s response). 

To say the Fed has been supportive throughout this crisis is an enormous understatement.  Without getting too technical, they have essentially opened up their war chest and assured us they will use whatever means necessary to get the economy back on track.  Interest rates have been cut to near-zero levels, and money is being pumped into the economy (through wide-ranging asset purchases) at a rate exceeding even that of the 08-09 financial crisis.  While these efforts have already been instrumental in preventing widespread bankruptcies and maintaining a healthy lending environment, the Fed remains adamant they have many more tools at their disposal should they be required.  

The second theme worth mentioning is the fiscal, or government, response.  This has taken the form of expanded unemployment benefits, one-time stimulus checks, small business loans, etc., and has been largely responsible for putting money in people’s pockets and keeping businesses afloat while there is no revenue coming in the door. Simply put, shutting down the economy could have been a lot more painful had it not been for these aggressive actions.

The final theme centers around the state of the virus and the re-opening of the economy.  Initial results have been mixed in both of these areas but, by-and-large can be characterized as “better-than-feared.”  This is extremely important for markets because it helps reduce uncertainty, and there are few things markets hate/fear more than uncertainty.  Back in March, investors had no idea what the future looked like and therefore began pricing in some truly cataclysmic scenarios.  However, once we began to see data suggesting a flattening of the curve and continued resilience of the US consumer, those worst-case scenarios began to come off the table.  Many questions remained unanswered, but this, at least, granted some level of confidence that this crisis would be less severe than initially feared.

Put all these things together and we get back to the title of this article: “Shoot First, Ask Questions Later.”  Projections for the speed/trajectory of the recovery remain shaky at best and it is unclear what the longer-term implications of our unprecedented response efforts will be.  But what we do know is that life is slowly starting to return to normal and people seem willing and able to spend.  Add in the safety net provided by the ongoing stimulus efforts and you’ve got a situation where investors appear more concerned with missing the potential rebound than nailing down answers to all the unknowns.       

Of course, this can all change in an instant with a prolonged resurgence of the virus, stalled progress on a vaccine/treatment, or some weaker-than-expected economic data.  Accordingly, it is very difficult to figure out what this all means for the markets, especially in the short term.  We are likely to see more headline-driven volatility as investors work to digest the ever-changing news flow on a daily basis.  However, the longer-term story remains intact.  We have seen companies with good management teams and strong balance sheets weather this storm better than others, and that will continue.  Additionally, there will be new opportunities that emerge from all of us adapting to a slightly new way of life and we are actively working to find those best positioned to take advantage of these trends. 

As always, stay safe and healthy!