Economic Data Is Bad, but That’s Not What’s Worrying Investors

May 15, 2020

• Recent stock market weakness is not due to the horrible economic data.
• Emerging factors point to slower, U-shaped recovery.
• We believe volatility will endure as uncertainty remains high.

Equity markets are retreating for a fourth consecutive day as dreadful economic data continues to be released. Initial jobless claims for the past two months are near 37 million. To put this in perspective, we gained 22 million jobs over the just-ended 11-year economic expansion, which was the longest on record. However, this horrendous news was expected, and investors have been largely looking past bad economic data and to a future economy full of trillions of dollars in fiscal stimulus and record-low borrowing costs. Optimism was relatively high and a V-shaped—or quick— recovery was being priced into markets. The recent market weakness isn’t due to the economic data but other factors, which we think point more to the slower U-shaped recovery that we have been anticipating.

While this recent market weakness is relatively mild and could even be explained by some profittaking after markets rallied in April, there are several factors bubbling up that could point to a slower recovery. As some states begin to reopen while others do not, the political climate is getting more contentious, which does not help the prospects for Congress agreeing on more fiscal stimulus. Some states and cities will need more money than others, and there are disagreements on reopening these economies for business. Additionally, as states and cities relax social distancing policies, the number of new cases will inevitably rise, which will cause speculation regarding a second wave of infections. Lastly, the pandemic is casting doubts on a U.S./China trade deal, as the two sides have grown further apart due to the virus.

Overall, our base-case scenario of a slower, U-shaped recovery with increased volatility remains intact. We believe investor optimism has been too high. While the amount of stimulus being pumped into the economy is enormous, it will take time to work its way into the real economy, and there will be bumps along the way. Many Americans have lost their jobs, and others will be reluctant to spend money for a host of reasons, including the fear of losing their job and the fear of contracting the virus. With consumer spending accounting for roughly two-thirds of the U.S. economy, this will slow the growth of the recovery. We do think the stimulus measures will limit the downside, and more stimulus is likely in an election as politicians will be reluctant to go back to their constituents without approving more money. We will recover, but it will be slower than what the markets were previously predicting. With so much uncertainty, volatility will inevitably remain.

We continue to recommend focusing on things that we can control, like long-term risk-and-return goals and being diversified among sectors and asset classes. There will be opportunities in this market as valuations diverge between sectors and asset classes, but we think investors will need more clarity before volatility subsides. These are challenging times, but your financial professional can help you stay on course.

This report is created by Cetera Investment Management LLC

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