Six months down, six more to go

A perspective from E*TRADE Capital Management, LLC 06/18/20

Years from now, when someone mentions 2020, those of us who experienced these past six months will no doubt recall a period marked by a global pandemic and a profound social justice movement. We may also be reminded of a run on paper products, the threat of murder hornets, the insanity that was Tiger King, and how we looked on with jealousy as the astronauts on board the SpaceX Crew Dragon left Earth far behind them. 

Not to mention one of the most pronounced crashes in the history of financial markets, a decade’s worth of job gains erased in a matter of weeks, and a return to market volatility not seen since the 2008 financial crisis.  

So, what does the rest of this year have in store for us? As the market stands right now—believe it or not—optimism is high. And while many market watchers may think the worst is squarely behind us, the path ahead is still clouded by much uncertainty. There are more than a few questions to contemplate, macro trends to account for, and pitfalls to avoid in navigating to and through 2021, so let’s dig in.  

Volatility: Par for the course

Investors shouldn’t be surprised to see volatility remain high relative to long-term historical norms, even if the market’s price swings aren’t quite as dramatic as they’ve been in recent months. The S&P 500®, for example, recovered from its March lows and even briefly pushed into positive territory for the year before tumbling more than 6% on June 11.

Source: FactSet Research Systems

While the Cboe Volatility Index (VIX®)—the stock market’s fear gauge—has retreated from its March high, if we look to the 2008 market collapse for perspective, there are likely still bouts of volatility to come. The chart below shows the VIX was far below its October 2008 peak in March 2009, but the S&P 500 was nonetheless selling off to fresh lows.

Source: Power E*TRADE

Potential market catalysts

The market appears to be pricing in the rosiest forecast for an economic comeback, thanks in part to massive stimulus from the Federal Reserve and Congress and plans to reopen the country. But many analysts (and the Fed) are painting a more sober picture given the extraordinary uncertainty of the path ahead, which could be altered by several factors, including:

  1. Economic data. Market watchers will be keeping a close eye on jobs and spending numbers for indications that Americans are returning to work as the country reopens—and that businesses and consumers are willing (and able) to open their wallets. While May’s jobs report showed surprising strength in the labor market, and a major bounce back in retail sales offered an encouraging sign that a recovery may be underway, the Federal Reserve has been cautious to exude the “all clear.” In its first economic forecast of the year, the Fed predicted GDP shrinking by 6.5% in 2020, with unemployment at 9.3% by year-end.1 The good news, though, is that it’s forecasting 5% GDP growth for 2021, and anticipates a 5.5% jobless rate in 2022—high, but less than half the current rate. 
  2. The course of the virus. Without a vaccine, a second wave of outbreaks remains a threat to getting the economy fully back up and running. As states reemerge from initial lockdown measures, if businesses are forced to reclose and Americans are once again ordered to stay home, the impact to jobs and spending could be devastating. Further, if the year-end/early 2021 timeline for a safe and effective vaccine proves overly optimistic, markets could face a potentially big setback.
  3. Additional stimulus. Historic monetary and fiscal stimulus packages have helped prop up the economy and financial markets since the outset of the US outbreak in March, but Fed Chairman Jerome Powell has been outspoken in his belief that more support is likely necessary to make sure the economy is not permanently scarred.2 Congress is reportedly considering another round of direct relief payments,3 and the Fed has pledged to maintain low interest rates until a recovery is firmly underway. Any additional stimulus, including yield-curve management (the Fed purchasing longer-term bonds to further depress interest rates and goose the economy), may give markets a boost. Case in point: The rally that followed the Fed’s announcement that it is expanding asset purchases to include individual corporate bonds4 and news that the White House was again floating a massive infrastructure spending package.5 
  4. The presidential election. Given the uncertainty surrounding the coronavirus and the speed of the economic recovery, the presidential election may be less of a factor for the market than in years past. That said, the outcome of the November election could pose potential risks either way. A Democratic victory could threaten policies generally favored by Wall Street, including lower corporate tax rates and fewer regulations.6 A second term for President Trump could raise concerns about the possibility of a US-China trade war—a familiar source of market turmoil.
  5. Geopolitical tensions. In addition to renewed tensions between the world’s two largest economies, the prospect of conflict in hot spots such as the South China Sea and Korean Peninsula are always possibilities.

Portfolio considerations

Just as no one could have likely predicted in January how quickly the coronavirus would upend the economy and markets, in late March few people would have expected that less than 10 weeks later the broad market would be nearly positive for the year. 

While it’s impossible to know if the recent rebound means the worst is over—or, rather, that the market is due for a test of the March lows in the coming months—there are a few things investors may want to consider as we move into the second half of the year:

  • Pitfalls of reaching for yield: With interest rates near zero for the foreseeable future, the temptation to hunt for yield opportunities may be growing. Keep in mind that the highest-yielding assets are also often some of the riskiest and could be highly susceptible to sharp price swings in a fragile economic environment.
  • A weakening US dollar: Undoubtedly, the massive amount of monetary and fiscal stimulus has helped markets weather the virus-induced downturn, but it comes with the cost of rising debts and deficits. As the Fed prints more dollars, the value of those dollars decreases.7 But a weak dollar relative to other currencies may benefit international stocks.
  • Sector rotation: As the economy begins to emerge from the depths of the lockdown, some investors may be eyeing traditional value stocks like financials and energy which may benefit from a broad economic recovery. Additionally, more fiscal stimulus could lead to an increase in spending, which may bolster cyclical sectors.

If we’ve learned anything over the past few months, though, it’s that diversification remains the cornerstone of a strong investment portfolio, especially in times of volatility and uncertainty. The best way investors can prepare for the next six months is to ensure their portfolios are well-diversified and aligned with individual timelines, long-term goals, and risk tolerance.

  1. The Federal Reserve, Summary of Economic Projections, 6/10/20,
  2. The New York Times, “Fed Leaves Rates Unchanged and Projects Years of High Unemployment,” 6/10/20,
  3. CNBC, “Additional stimulus legislation may be coming. Here’s what could be in it,” 6/11/20,
  4. CNBC, “The Fed says it is going to start buying individual corporate bonds,” 6/15/20,
  5. Bloomberg, “Trump Team Weighs $1 Trillion for Infrastructure to Spur Economy,” 6/15/20,
  6. Reuters, “Investors brace for market swings as Trump slips in election polls,” 6/9/20,
  7. Morgan Stanley Wealth Management, “As Sectors Rotate, Look Under Market’s Surface for New Leaders,” 6/8/20,

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