Jason Gunkel, CFP®, CFA, CAP®, Chief Investment Officer
July 23, 2020
The stock market (as represented by the S&P 500 stock index) has continued its rally this month, rising over 4% through July 23. Investors have remained focused on the positive impact of the economy reopening despite COVID-19 cases flaring up in spots around the country. In fact, monthly retail and food services sales in the U.S. returned to pre-pandemic levels in June, according to the U.S. Census Bureau.
Companies are now reporting their second-quarter earnings results and the expectations are very low. Analysts’ consensus is for profits to decline 40% or more compared to the second quarter of last year, according to Schwab Market Research. However, these poor results may have less of an impact on the stock market because investors are likely expecting them. Instead, investors will be paying closer attention to the commentary by corporate executives on their expectations for the remainder of the year and beyond.
More than 1.4 million people per week are still filing for unemployment benefits, according to the U.S. Department of Labor. The CARES Act that was passed by Congress in March provided additional unemployment benefits of $600 per week. However, those benefits are set to expire on July 31 and the average unemployment payout will drop to $333 per week for the 17 million Americans receiving the benefits, according to Charles Schwab. If the benefits are not extended by Congress, it could significantly affect consumer spending and the recovery of the economy.
In Europe, many countries are also dealing with high rates of unemployment. The Eurozone unemployment rate is expected to converge with the rate in the U.S. at around 10% by the end of the third quarter, according to Bloomberg. However, European unemployment benefit programs work differently and their benefits are not expected to drop nearly as much as in the U.S. at the end of the month.
In addition, the European Union has contained the COVID-19 virus much better than the U.S. The number of new cases in the European Union has flattened to about 4,600 per week compared to the rising 66,900 per week in the U.S., according to John Hopkins University. This might help explain why international stocks (as represented by the MSCI EAFE index) have rebounded well and outperformed U.S. stocks (S&P 500 index) in six of the past eight weeks.
Congress is currently debating the terms of another relief package that could again include businesses, individuals, and unemployment benefits. The best-case scenario is that the U.S. is able to avoid further shutdowns due to the pandemic and that fiscal stimulus helps boost a “V” shaped economic recovery by the end of the year.
We can remain hopeful that the worst of the economy and market drops are behind us, although many experts are still predicting a slower “U” or “swoosh” shaped recovery (see our previous article on recovery shapes). As always, Syverson Strege will continue to look for opportunities to improve our long-term investment strategies through any economic recovery scenario.