The Vantagepoint Market Perspective: Reopenings, Protests, and the Markets

06/03/2020

 

The protests, riots, and curfews that have evolved during the past week in multiple cities — along with the underlying issues that prompted them — have been tragic on many levels. However, while the situation is clearly very serious, so far, the financial markets seem to be looking ahead to the prospects for an economic restart and recovery later this year and into 2021 and 2022.

The Economic Picture

From a data standpoint, the recent macroeconomic news has indeed been somewhat promising. First-time unemployment claims, while still extremely high, have been declining since late April. Still, a stunning total of 40.8 million people lost their jobs and filed for unemployment during the COVID-19 pandemic and the widespread closures it spawned. And that does not include the nearly 8 million self-employed workers who also filed for assistance. We’re likely to get a fuller view of the employment situation when the Labor Department’s widely watched national payroll report is released this Friday, June 5, 2020. 

Meanwhile, personal income has also held up reasonably well, jumping 10.5% in April, thanks largely to the government’s income replacement efforts and relief checks.

On the downside, consumer spending, which fuels roughly two-thirds of U.S. economy, tumbled -13.6% in April from March, according to the Commerce Department. That marks the worst decline since the government began tracking that data more than six decades ago. The widespread closures squelched spending in stores and for services not deemed essential. The question is whether that spending will quickly resume as those venues reopen with the gradual cessation of the shutdowns.

So far, the markets have embraced the reopenings, with valuations seemingly anticipating the complete and uninterrupted success of the economic restart. However, it remains to be seen if the ongoing civil unrest and protests will curtail or delay their continuation. Small businesses — particularly those that support offices that are no longer occupied — have faced a host of difficulties due to the COVID-19-inspired shutdowns and for some, the current tumultuous period is further magnifying those challenges.

Small Business Challenges

According to the U.S. Small Business Administration, in 2019 small firms employed 47.3% of the private  workforce. For privately held, mom and pop operations, whether they survive or fail may not necessarily be reflected in the stock market. In fact, if large numbers of private, small businesses cease to exist, their goods or services may in part be replaced by large, publicly held chain stores and restaurants that are well-capitalized enough to survive the current downturn.

If that happens, it may well benefit the stock market in the short term. However, those gains could be short-lived if the millions of people who formerly worked at those privately held firms remain unemployed and consumption ultimately goes down, absent additional fiscal and monetary support.

As we mentioned earlier in this piece and in previous ones, there seems to be a disconnect between the market’s recent gains and what’s happening on Main Street. The market seems to be taking a long-term view of the current situation on many fronts and focusing on the positive aspects of the recent economic statistics. Whether that actually reflects the reality ahead remains undetermined.

It’s also important to remember that the current batch of economic readings are coming off lows that have not been seen in generations. And while the bounce back is definitely a positive, the question remains whether it can continue in the months ahead and if the economy will not only return to its former levels, but continue to head higher.  

Currently, the market seems to be pricing in a recovery that’s shaped like the letter V — a quick drop followed by an equally quick recovery. However, if it turns out to have what some market observers have dubbed a square root shape — a fast downturn, followed by a brief upturn that ultimately flatlines — it may become more difficult for the market to justify continued price gains absent further stimulus from the government and the Federal Reserve.

Disclosures:

This information is intended for institutional use only and is not intended for individual investors or the general public. This article includes links to external websites. While we believe this information to be reliable, we cannot guarantee its complete accuracy.

Please note that this content was created as of the date indicated and reflects the authors’ opinions. These opinions are subject to change, without notice, due to market conditions or other factors.

This is not intended as a solicitation nor does it constitute investment, tax, or legal advice. Reference to any fund or asset class is not a recommendation to buy, sell, or hold that fund or asset class. Neither ICMA-RC nor its subsidiaries are responsible for any investment action taken as a result of the information provided herein or the interpretation of such information. Investors should carefully consider their own investment goals, risk tolerance, and liquidity needs before making an investment decision. Investing involves risk, including possible loss of the amount invested. Past performance is no guarantee of future results.

When Funds are marketed to institutional clients by our Defined Contribution Investment Only (DCIO) team, the Funds are offered by ICMA-RC Services, LLC (RC Services), an SEC registered broker-dealer and FINRA member firm. RC Services is a wholly owned subsidiary of ICMA-RC and is an affiliate of VantageTrust Company, LLC and Vantagepoint Investment Advisers, LLC. Learn more at www.vantagepointfunds.org.

Disclosures:

This website is for institutional use only and is not intended for individual investors or the general public.

This information is intended for institutional use only and is not intended for individual investors or the general public.

Please note that this content was created as of the date indicated and reflects the authors’ opinions. These opinions are subject to change, without notice, due to market conditions or other factors.
This is not intended as a solicitation nor does it constitute investment, tax, or legal advice. Reference to any fund or asset class is not a recommendation to buy, sell, or hold that fund or asset class. Neither ICMA-RC nor its subsidiaries are responsible for any investment action taken as a result of the information provided herein or the interpretation of such information. Investors should carefully consider their own investment goals, risk tolerance, and liquidity needs before making an investment decision.

When Funds are marketed to institutional clients by our Defined Contribution Investment Only (DCIO) team, the Funds are offered by ICMA-RC Services, LLC (RC Services), an SEC registered broker-dealer and FINRA member firm. RC Services is a wholly-owned subsidiary of ICMA-RC and is an affiliate of VantageTrust Company, LLC and Vantagepoint Investment Advisers, LLC. Learn more at www.vantagepointfunds.org.