Last Friday’s employment report was a true shocker by showing a gain of 2.5M jobs (estimates were for 7M losses), which may have revealed that our nation has reached an important inflection point much sooner than anticipated. Following the incredibly strong labor report, the S&P 500 officially had clawed back all its year-to-date losses on Monday as part of an epic rally that caught nearly all market observers by surprise for both its speed and tenacity, notwithstanding yesterday’s market turmoil. 2020 has now not only seen the fastest bear market in history, but also the quickest bull market as well. As yesterday’s market action demonstrates, there remain challenges ahead for companies and the economy – as our Fed acknowledged in its downbeat economic outlook earlier this week – which could keep volatility and uncertainty high.
The powerful rally has been fueled by both unprecedented stimulus (see chart above) and a vigorous re-opening of American businesses, following more than two months of an economic deep freeze for many areas of our economy. As we noted in the April 17th JNBA podcast, we believed the massive, coordinated global monetary and fiscal stimulus would help to offset some of the economic impact from the pandemic. In the short run, all this stimulus – now 28% of world GDP and counting (source: Schwab) – signaled that most governments would support the global economy at all costs, helping to calm nerves and resulting in a sharp rally. Basically, governments around the world have been carrying around a blank checkbook and ready to write checks at the first sign of financial market stress. This has added a floor under many asset prices in the short-term but will likely have unintended consequences longer term – a conversation for another day.
The JNBA Investment Committee still believes much of this stimulus could ultimately serve as an effective bridge for households and firms encountering short-term cash flow difficulties but likely will not solve long-term insolvency issues. In our view, all too many job losses and business failures may be permanent in nature. Still, there is no denying that consumers are chomping at the bit to resume life as normal, with many economic data points showing strong growth off the bottom for auto sales, mortgage applications, hotel occupancy, and more.
While the pace of further gains might slow and stock volatility could escalate at these higher market levels, we view the increasing participation of small and value-oriented stocks in the recent market rally as a healthy development, and one that had been lacking until the last couple of weeks. This indicates the market rebound might be more sustainable in nature given an increased number of companies are participating. However, with stock valuations at the highest levels in nearly two decades, we believe market enthusiasm has gone a bit too far. In fact, as of last week not a single stock in the S&P 500 had been down over the past 10 weeks.
As such, we are cautious as stocks have priced in a recovery, leaving little room for disappointment if and when future setbacks occur. While this could take the form of another coronavirus wave, there are no shortage of setback candidates, including further civil unrest, pre-election jitters, or rising geopolitical and trade tensions with China. Furthermore, we note the bond market is not confirming the strong economic rebound that is currently reflected in stock prices. It remains to be seen if the recent V-shaped recovery in the markets is truly a full-fledged recovery or just the early rebound into a square-root shaped recovery that might soon run out of gas.
Please know that the JNBA Investment Committee is monitoring and managing through these current events, working diligently on your behalf, and keeping your goals and best interests front and center as new information becomes available. We will continue to share relevant market-related information that guides our portfolio management practices.
Thank you for your continued trust in JNBA not just as your financial advisor, but also as your advocate. Please do not hesitate to reach out to your advisory team if you need anything at all.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, Inc.
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