The Vantagepoint Market Perspective: Trust, but Verify

05/21/2020

 

Back in the Cold War days of the 1980s, as President Ronald Reagan was negotiating with the Soviet Union, he adopted and popularized an old Russian proverb: trust, but verify. The former president’s signature phrase increasingly comes to mind as we monitor the latest COVID-19 news and the market’s reaction to it.

Headline Moves

In recent weeks, the stock market has seemed to cling to any headline that fosters hope for an effective treatment or vaccine — no matter how realistic or close to fruition it may be. For instance, on Monday, news from Moderna that its COVID-19 vaccine candidate had shown positive results in an early test sent the Dow Jones Industrial Average rocketing up more than 900 points. The next day, the Dow and the other major indexes only partially retreated in the wake of a report that noted experts had raised questions about the vaccine trial’s findings. 

Wednesday brought renewed market enthusiasm for another possible solution. This time traders pinned their hopes on word that a potential vaccine from Inovio Pharmaceuticals had shown early promise in tests on lab animals. That, combined with renewed optimism about the prospects for a speedy economic recovery as the statewide lockdowns are lifted, helped send stocks higher.  

This week’s action is just a microcosm of what’s been going on since late March. Increasingly, the market has enthusiastically latched on to even the slightest sliver of hope — whether it’s a potential quick fix to the COVID-19 problem or any other positive news. However, it has also tended to take any bad news that surfaces along the way in stride as it looks ahead to the future.

The Market and Main Street

Meanwhile, as Wall Street has rallied, large swaths of Main Street have been brought to their knees due to the widespread shutdowns that were enacted in an effort to curb the virus’ spread. In short, the disconnect between the two worlds — the market and the economy — appears to be somewhat extreme. Presumably, both of those now-decoupled views will ultimately come back into alignment at some point in the future. However, when that happens and how remains to be seen. 

The market seems to be betting that the economy will rapidly improve as this country’s states and localities continue to reopen and vaccines and treatments continue to be developed. It also seems to be assuming that the reopenings will go smoothly and won’t spark a significant uptick in infections, which would require a step backward.

Traders also appear to believe that the nation’s different economic participants, both individuals and businesses of all sizes, will soon return to their old ways and spending habits. If this does indeed happen, a turnaround in third quarter or later this year is likely. However, the key word in that sentence is “if.” What actually happens still remains to be seen in the weeks and months ahead. 

Then there’s the political aspect. During the past decade or so, Wall Street has become fairly adept at looking past the bickering in Washington to determine what legislation and policy responses may actually be forthcoming. Currently, the political parties differ widely on the next legislative policy response, both in terms of substance and urgency.

Given the market’s general positive sentiment relative to actual economic fundamentals, the market nevertheless seems to be pricing in additional fiscal help to soften the shutdown’s impact on businesses and state and local governments, as well as to provide additional aid to the millions of individuals who are dealing with unemployment.

The market also may be looking ahead to 2021 or even 2022 and anticipating that regardless of which party wins the presidential and/or Congressional elections, there won’t be any significant changes in policy or legislation that would negatively impact the stock market or company valuations. We believe it’s fair to assume that the political and campaign debates in the coming months will highlight differences rather than shared objectives, which could test the market’s resolve in looking through the political calendar.

Whichever line of thinking is correct — the stock market’s or the economic reality to come — the two views are likely to at least partially converge in the weeks and months ahead as the effects of the shutdowns and the reopenings continue to play out and the market’s trust in positive outcomes seeks verification from data and events. We sincerely hope that the reopenings are successful and that the nation can gradually return toward normal, even as our definition of normal continues to evolve.

 

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.