Monthly Markets Memo - July 28, 2020
by Dan Zalipski, CFA
The market continues to trend higher as the economic recovery pushes forward, with the S&P 500 coming within one percent of where it started the year. The international markets are well off their lows but have not rallied to the same degree as the U.S. markets.
Interest rates remain low with the Fed signaling that they do not intend to raise them until the economy is healed. As earnings season begins, investors are all but disregarding the ugly results from the 2nd quarter and focusing on what companies see in the months ahead. Investors have been encouraged by recent economic and earning reports that are exceeding expectations. Comments from Fed officials and CEOs, however, look to temper that excitement, citing uncertainty in the coming quarters as to how the recovery will progress.
The Federal Reserve Chairman Jerome Powell spoke recently to the House Financial Services Committee. Powell acknowledged the bounce back in economic activity as welcoming news that came earlier than expected. He also noted that the path forward is “extraordinarily uncertain and will depend in large part on our success in containing the virus.” The Fed is credited for quickly reacting to the crisis, slashing interest rates, and initiating numerous lending facilities intended to prevent a structural breakdown of market activity during times of heightened stress. Executives leading the country’s largest banks have echoed Powell’s comments in their most recent earnings calls. JP Morgan CEO Jamie Dimon noted that this is not a normal recession and that “The recessionary part of this you’re going to see down the road.” He went on to explain that the effects of the recession, higher unemployment, and lower wages coupled with a decrease in economic activity, are being deferred due to the stimulus passed by Congress. Stimulus checks, enhanced unemployment insurance, and small business loans are providing a way for businesses to prevent layoffs while providing monetary assistance for citizens.
As July comes to a close, the enhanced unemployment benefits Congress passed in March are set to expire. This vital lifeline is set to disappear as roughly 14 million people remain unemployed due to the pandemic. The government has taken note, indicating an additional round of stimulus is expected. The package is likely to include aid to state and local governments, legal protections for employers, unemployment insurance reform, and money for schools to reopen. In addition to this, there is an expectation that the Paycheck Protection Program will be extended and replenished to avoid further layoffs. There also seems to be a consensus that the enhanced unemployment benefits will continue but at a reduced amount and may even include an additional bonus to those that go out and find a new job. Direct stimulus checks to citizens are also being considered but will be more targeted to those with lower incomes. The stimulus is expected to pass by the end of July after several rounds of negotiation.
Some positive news on the vaccine front was announced recently from Moderna Inc. The company has been working with the National Institutes of Health to develop a vaccine for Covid-19. They recently concluded a trial of 45 volunteers that took the vaccine back in March. All 45 volunteers developed neutralizing antibodies at levels comparable to those who survived a Covid-19 infection. The next trial will expand to 30,000 volunteers. Moderna representatives are hoping to have the vaccine widely available by year-end. Other notable companies are also embarking on large vaccine trials, including Johnson & Johnson and Pfizer Inc. Dr. Fauci, director of the National Institute of Allergy and Infectious Disease, commented that people think “this is a race for one winner. Me, I'm cheering every one of them on. We need multiple vaccines. We need vaccines for the world, not only for our own country.”
“We have entered an important new phase and have done so sooner than expected. While this bounce back in economic activity is welcome, it also presents new challenges — notably, the need to keep the virus in check.” - Federal Reserve Chairman Jerome Powell
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