Will There Be A Second Round?

July 6, 2020

A Market Dominated by COVID-19 Headlines

June was an eventful month as markets had their best quarterly performance in decades. Many states began re-opening their economies in May and the spillover of those moves seemed to give investors optimism that the COVID-19 pandemic was being curbed. This, combined with the Federal Reserve’s determination to provide as much support as needed, helped markets rally in the beginning of June. However, the rally slowed down as the U.S. saw a spike in COVID-19 cases. This new wave of cases has some investors worried about additional rolling national lockdowns and restrictions, which several states implemented in advance of the July 4 holiday. The impacts of another large-scale lockdown could be detrimental to the U.S. economy and the stock market. 

Dispersion Between Stock Returns and Economic Indicators

As previously mentioned, the stock market had its best quarterly return in decades even amongst all the negative economic indicators that have been released.  First and foremost, the U.S. economy’s real GDP declined -5% is the first quarter.  Some predictions have real Gross Domestic Product (GDP) declining -34.5% in the second quarter which would put the U.S. in a technical recession (a decline in GDP in two consecutive quarters). The decline in real GDP was largely impacted by the massive increase in U.S. jobless claims, levels not seen since the Great Depression.  People losing their jobs, combined with households saving more and spending less, really put a dent into the real GDP numbers as consumer spending makes up about 70% of U.S.  GDP. Estimates have the U.S. economy bouncing back in the third and fourth quarters, but if the U.S. experiences another national lockdown, the recovery could be in jeopardy.

Technically Speaking

All major indices ended the month of June with positive returns, led by the tech heavy NASDAQ Composite Index that rose 6.07%.  Diving deeper, the NYSE FANG+ Index (composed of Facebook, Apple, Amazon, Netflix, Google, and a few other highly traded growth, technology stocks) outpaced every major index gaining 8.28%. This is a story we have seen before as these stocks led the way during the recent 11-year bull market.  Given the strength of the recent rally, both of Stadion’s trend-following strategies ended the month of June fully invested in equities.

What’s Next?

The stock market is a forward-looking machine so although we are currently near levels seen before the COVID-19 pandemic, there is hope that the U.S. economy will prevail as it has done previously multiple times over.  There is hopefulness that a vaccine will be created, and until then the Federal Reserve has publicly stated that is still has tons of ammunition left to provide support to the U.S. economy. Betting against the FED has been a negative proposition over the last bull market cycle as they provided a backstop for the U.S. stock market. If another round of national lockdowns occurs, it will be interesting to see how markets react. Will it be as bad as the first drawdown?  Only time will tell.

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies.

The NYSE FANG+ Index is an equal-dollar weighted index designed to represent a segment of the technology and consumer discretionary sectors consisting of highly traded growth stocks of technology and tech-enabled companies such as Facebook, Apple, Amazon, Netflix, and Alphabet's Google.

There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical measurements are one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity.

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