More Sunshine in the Forecast?

Sometimes, “perfect” weather can stay around even longer than we hope/expect. Ever been on a vacation, where it’s clear and sunny for the majority of your stay? The warmth of the sun, after a period of dreary rain often brings happiness, hope, and joy.

There has been a lot of sunshine in the stock market lately. This past Wednesday marked the 50^th day since the markets bottomed on March 23. Since that day, the S&P 500 has risen 39% higher. According to Bespoke Investments, this was the biggest 50-day move in more than seventy-five years. Based on history, what type of weather forecast should we expect for the future?

If history is our guide, we could be in for at least a little more sunshine ahead. Since 1950, there have been two other instances when the markets have surged 30% or more during a 50-day period. Those prior surges were followed by even higher levels over the next three-, six-, and twelve-month periods. In fact, those two previous spikes led to multi-year bull markets and on average gained 21.5% over the next twelve months.

Now, two prior instances is not a large sample size, but if you expand to include advances of 20% or more, there have been seven other times since 1950 when the markets have surged 20% or more.

In those previous times, stocks were higher

• 71% of the time, one month later
• 85% of the time, three months later
• 100% of the time, six and twelve months later.

In these seven previous occasions, the S&P 500 gained over 10% during the next six months and returned over 17% during the next twelve months. The question becomes: “Will the pandemic and other extenuating circumstances make this situation different?”  It looks like this high-pressure system might stick around, but weather (and the markets) are very hard to predict.

The last 50 days have been marked with protests, social unrest, poor economic data, and dreary forecasted corporate earnings. These would seem be more associated with rainy weather than the sunshine we have seen.

How can the stock market continue to shine when there appear to be so many storm clouds around? As we have been highlighting recently, investors are not focused on the potential for an afternoon shower.  The first and second quarters of 2020 saw the low-pressure system, full of storms and poor economic data, get pushed past us. Now, Wall Street is looking ahead to the third quarter, and the sun has already broken through the clouds.

Optimism and hope for the future are taking center stage with all 50 states in the process of reopening their economies. Even New York City, which was the epicenter of U.S. COVID-19 outbreak, this week has begun Phase 1 of its reopening plan. There are also other rays of sunshine that have started to appear.

Recently, the Institute of Supply Management (ISM) manufacturing index and its non-manufacturing, service index both improved in May, with new orders and production components showing signs of improvement.

Additionally, the Commerce Department recently reported that durable goods orders have held up better than expected, with core orders dipping much less than forecasted. This is important, because they represent business investments. Durable goods orders are expected to improve in the coming months as manufacturing activity accelerates.

And, as evidenced by last week’s surprise labor report, the unemployment numbers are improving. The Labor Department announced new unemployment claims and the number of people collecting unemployment insurance are both falling. This is showing that jobs may be recovering much faster than most have anticipated.

Although there is much better weather expected, we still need to be on watch for patchy clouds and an occasional thunderstorm.  We cannot expect June and July’s economic activity to fully offset the negative growth that took place in prior months. U.S. GDP growth will still be negative for the first two quarters of 2020, which means the COVID-19 shutdown will officially be labeled as a recession.

As we move forward, we remain optimistic and full of hope for the future. We expect third quarter GDP to be exceptionally bright, as economies reopen and people anxiously get back to their favorite activities and some sense of normal routines.

Nonetheless, we need to stay focused and vigilant in seeking out companies you can be “proud to own” and those with superior fundamentals, positive earnings trends, and solid guidance for the future. Our investment team is prepared to help guide your portfolio, whether we see rain or shine in the weeks and months ahead.

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

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