At the Start, Markets Rallied

The equity market had been on a strong upward trajectory since bottoming in late March. From March 23 through June 8, the S&P 500 had gained 995 points and the NASDAQ closed at a record high level on June 10.

Equity markets and other “risk assets” responded favorably to the Federal Reserve’s efforts to inject liquidity into the markets and support of certain key market segments through special facilities.

Investors were “looking through” the economic damage from shelter in place and seeing a recovery in the second half of the year as the economy reopened for business – a good example of how markets are forward-looking and economic data is reported with a lag.

Through this period, equities appeared to be focused on the following factors and assumptions:

  • The Fed’s efforts to supply liquidity to the markets
  • A short-lived COVID-related shut down
  • The economy would reopen in a relatively orderly fashion

This Week It Has Pulled Back

After the recent surge, a pullback was widely expected. Since Monday, June 8, the S&P has lost approximately 220 points and the Dow over 2,400 points as sentiment has turned more negative. Many investors were uncomfortable with the velocity of the rally with the S&P 500 having its best 50-day period ever. Also, as signs of a potential second wave of the pandemic have increased in certain states, investor sentiment has deteriorated.

In this week’s sessions, we believe the following have been key factors to the pullback:

  • Fears that the economic damage could be longer and deeper than expected
  • A whiff of disinflation/potential deflation in the Consumer and Producer Price Index readings
  • A somewhat dour outlook from the Fed

What’s Next?

The Fed has provided a tremendous amount of liquidity and has promised to do more if necessary, including providing guidance of leaving rates at 0% likely through 2022 and will continue to purchase assets “at least at the current pace” to support the economy. While this is supportive for equities, we would suggest the markets are looking for clarity.

The Efficient Market Hypothesis suggests that markets are a discounting mechanism based on available information. While the degree is in question, market participants can agree that the damage to the economy has been substantial. What is in question is when the recovery starts. Is it the second half of this year? Or will a potential second wave of COVID lead to additional shelter-in-place orders, deeper economic damage and push recovery even further into the future? We expect markets to remain volatile and sensitive to health care news for now.

This period has been unique in history with a forced recession, shelter in place and unprecedented fiscal and monetary policy support. As we navigate these uncertain waters, remember that in other deep economic troughs, relying on tried and true strategies has helped eliminate emotional responses and led to investment success. Our guidance would be to continue with those strategies today; namely asset allocation and diversification, periodic rebalancing and maintaining a longer-term perspective to match longer-term goals.

© 2020 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.