Great Expectations?

Posted In: COVID-19 Market Update

Sometimes, life throws us pleasant surprises. In Charles Dickens’ novel Great Expectations, Pip, an orphaned blacksmith’s apprentice, facing an impoverished future, suddenly comes into a large fortune from a mysterious benefactor.  The second quarter of 2020 was very much like this.  Many expected a dismal performance from the stock market, but, instead, we witnessed one of the greatest rallies in decades, with the S&P 500 surging 20% and the Dow Jones gaining nearly 18%.

 

The third quarter of 2020 is continuing this surprising trend. Last week the Dow was up over 3%, while the S&P 500 soared by 4%. Much of this recent strength has been fueled by better than expected economic news. After a stunning May retail report and then strong data in the real estate sector, last week’s much-better-than-expected jobs report became the latest pleasant surprise.

 

According to the Department of Labor, 4.8 million jobs were added in the month of June, which was nearly 1.6 million more jobs than expected. The unemployment rate has also fallen to 11.1%, which was also much better than the 12.5% forecast. These figures clearly show that the labor market is starting to bounce back.

 

After a robust second quarter of 2020 that was marked with a 20% gain for the S&P 500 and nearly 18% for the Dow, what should we expect for the third quarter of 2020?

 

If you measure the S&P 500 from the March 23 bottom to July 1, the market rallied an amazing 39%. That was the best 100-day performance in over 80 years, according to Bespoke Investments. When you have a rally of that magnitude, it’s impossible to top, right?

 

Maybe…but maybe not.  The good news is the U.S. markets are still positioned for a strong third quarter, with much of the economic data pointing toward a V-shaped economic recovery.  There have only been five other times where the market rallied 33% or more over a 100-day period; in every instance the stock market was substantially higher in each one month, three months, and six months following the prior stellar 100-day periods. The average gain one year later was around 13.5%

 

Consumers are feeling more optimistic about the future, and household incomes are trending in the right direction (nearly 4% higher than they were in February, before the coronavirus lockdowns). With strong spending and rising incomes, it’s no surprise that consumer confidence is also on the rise. The June Conference Board’s Consumer Confidence Index soared to 98.1 from 85.9 in May. With 70% of the U.S. GDP derived from spending, this recent data is very encouraging for the continuing economic recovery.

 

Now this doesn’t mean “good times” are guaranteed. Just like Pip’s journey into adulthood, we’ll likely see our share of plot twists and turns. After all, we are still in the midst of a pandemic. The country is still seeing a rise in COVID-19 cases, and some states are pausing reopening phases. While the employment news last week was certainly encouraging, we must remain cautious in the upcoming months.  The markets continue to consolidate, and the market leaders are becoming fewer. As we head into second-quarter earnings announcement season, we may experience the results of a fragile quarter, where many companies were on lockdown for much of the time.

 

This upcoming season will really magnify the difference between the leaders and the laggards. Many companies are positioned for dismal second-quarter results, while others will shine. Unlike Pip’s misfortunes on his way to maturity in Great Expectations, we pray that staying true to our research efforts and Proud to Own process will help us continue to uncover some of the best opportunities in the markets. By hand-selecting quality companies with strong earnings and sales, we hope to be better positioned for this upcoming earnings season and maybe even exceed expectations.

 

Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal.

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