May 2020 Market Insights

    May 2020 Market Insights
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    Linda S. Parenti, CFA
    Chief Investment Strategist

    The optimistic tone that led markets over the past few weeks was replaced by pessimism earlier this week. Investors were becoming increasingly encouraged by updates on declining COVID-19 case counts, potential vaccine developments, and plans for reopening our economy. This week’s more somber start came from the reminder that we still have a long way to go. Many fear that we will see a renewed wave of cases with the reopening of cities, requiring closures to be reinstated and prolonging our economic shutdown. Others fear that if we do not reopen our economy soon enough, the additional economic harm will push us into a deeper recession. In part, both views are correct. City and company restarts will be patchy. If we get a summer lull in virus transmissions, experts say we could see a new wave of the virus in the fall season. Approval of a vaccine would be cheered, but this will take months yet; and we are unlikely to see large scale availability until sometime next year. We know that COVID-19 will be with us for the foreseeable future, but perhaps we can take solace that the shutdown is accomplishing its task. New case counts continue to fall in the U.S. Our healthcare system and hospitals are now better positioned to handle patient loads.

    As we reopen the economy, the recovery coming out of this self-induced coma will be slow and uneven. Science has not yet given us an end date for the virus, which will determine how quickly the economy can recover. Add to this worry the recent revival of trade concerns with China and the additional unknown of the election outcomes this November. With so much doubt, Wall Street analysts have sharply cut earnings estimates for upcoming quarters. Since stock prices follow earnings estimates and earnings growth, this is the primary reason why stock prices are still down year-to-date. For now, sentiment from news updates are ruling the daily market direction since fundamentals and valuations are difficult to quantify.

    Given this negative setting, you may find it surprising that I have an optimistic view of equities. This is because the stock market does not always trend in the same direction as the economy but looks further ahead. In the short term, setbacks with case count growth and therapeutic solutions will keep markets volatile, and harsh economic readings will be increasingly discouraging. However, there will be a point when some of these uncertainties are lifted and perhaps even before economic growth starts to turn positive, earnings estimates will start to rise again for later quarters. I believe it will be at this point that stock prices will be able to find their footing. It is only a matter of when, which is nearly impossible to predict. Therefore, in these fast-moving markets we recommend maintaining equity allocations and focus much of our attention on advantageous shifts in holdings to reflect a post COVID-19 world.

    RISKS AND IMPORTANT CONSIDERATIONS
    Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.