Monday Morning QB - Market Observations:
- Europe is Experiencing a Surge in Covid-19 Cases, Hospitalizations and Deaths
- Stocks Fall as Fear of New Covid-19 Cases Leading to Shutdowns Grips Our Stock Market
- Worst Pre-Election Week for Stocks Since 1928
- Quality Earnings Reports Continue to Go Unrewarded
- GDP Report Makes a Compelling Economic Case -Record Snap Back from Q2 Shutdowns
- Consumers are Spending More but Borrowing Less – Will the Pattern Hold Through the Holidays?
- Post-Election Stimulus Plan Unclear – The "What and When" Details are Foggy at Best
Monday Morning QB - Market Performance:
U.S. stocks suffered their worst weekly declines since March. The resurgence in coronavirus cases has reinvigorated the worry over a return to mandated shutdowns.
Except for the S&P 500, all the major indexes fell into correction territory, down over 10% from recent highs.
Last week, the Dow Jones Industrial Average shed 1,834 points finishing the week at 26,502—a decline of -6.5%. The technology-heavy NASDAQ Composite fell for a second consecutive week, giving up -5.5%.
By market cap, the large-cap S&P 500 fell -5.6%, while the mid-cap S&P 400 and small-cap Russell 2000 fell more, -5.7% and -6.2%, respectively.
Covid-19 Resurgence Adds to Shutdown Fears
As cases are on the rise again, old and new virus fears are surfacing. The stock market is not big on uncertainty.
We are hearing the stories of multiple areas within the European Union returning to shutdowns in hopes of slowing the spread of the virus and leaving us to wonder if the U.S. is on the same path. In March, shutdowns led to the largest quarterly GDP decline and a plus 37% decline on the S&P 500 in only three weeks.
The big question? Are we worried or doomed? Let us start our discussion with a quick look at Europe.
The easy thing to do is assume that what is happening there will undoubtedly happen here, given our rise in new cases. The "happening", of course, is more shutdowns suffocating economic activity once again.
The following is not to diminish the issues we are having in the U.S.; we certainly have work to do. However, there are differences in the data that suggest things might be less bad here, or at least we still have a chance for a better outcome than Europe.
Pandemic fatigue is real.
In Europe people scarcely followed the remarkably simple pandemic guidelines of social distancing and mask-wearing as the perceived threat decreased. Europe was in better shape than the U.S. this summer, and things were getting back to normal, which led to complacency. Now, for the first time since March, the European Union is experiencing more deaths than the U.S.
According to the Wall Street Journal, the EU is experiencing around 1,370 deaths per day compared to 808 in the U.S. Rising infection rates and death rates have caused widespread shutdowns across Europe. Less economic activity creates serious economic issues, and the stock market reacts with a precipitous fall.
The Shutdown Effect – Europe versus the U.S.
We should fear shutdowns in the U.S. The self-imposed economic damage showed up in more ways than people perceived possible earlier this year. And yes, deaths in the U.S. are rising but slower than new cases and more slowly than in Europe.
Another critical difference between the EU and the U.S. is who is experiencing the worst of the rise in new cases.
In the U.S., the fastest-growing segment of newly infected is the younger generations, whereas in the EU the fastest-growing segment is people over age 65. We all know age is an important variable for explaining the difference in an infected person's Covid-19 experience.
What should WE do?
I like to remind folks that the Asian countries never shut down their economies as we have. Their success came through compliance. They let their people go about their daily business while the people followed the social distancing and mask-wearing guidelines.
We seem to act as if it is a choice. It's not. It is both, not either/or.
On a personal note, I have a son who is a cancer survivor. Cancer did not care about his politics, and neither does Covid-19 care about ours. There is nothing we can do for now to make Covid-19 go away.
We must learn to live the best way we can within our local area. Not all counties (or states) are the same and that is why going out or staying in should be a personal choice, not a state-imposed mandate.
However, if you go out, what should be state-encouraged is to wear a mask and social distance. A potential increase in your stock portfolio will be your reward!
A vaccine can not come soon enough.
Record GDP Growth
The second-quarter GDP decline, due to the shutdowns, was the worst on record. The reopening of our economy led to the best quarterly GDP growth on record. Thus, the description of a "V" recovery.
The third-quarter GDP growth recouped around two-thirds of the loss recorded in the second quarter. The U.S. economy increased 7.4% over the prior quarter, which equates to a 33.1% annual growth rate!
As a quick reminder, GDP (Gross Domestic Product) is the value of all goods and services produced across our economy. GDP is reported at an annual rate as if the quarter's pace continued for the full year.
Another important reminder is the rate of growth is a lagging indicator. GDP is a scorecard of what has already occurred.
The stock market was indifferent to the report due to the rise in Covid-19 cases.
Also, some credit for GDP growth goes to the President and Congress who were not playing politics to the point of failing to act in passing the first several rounds of stimulus packages. Too bad the same is not true today!
Can the Stock Market Climb the Wall of Worry?
The stock market caved last week to the wall of worry.
The growing Covid-19 scare, combined with believing we may follow in Europe's footsteps, added to the inability of Congress to create relief (additional stimulus) for the people hardest hit economically.
Falling to get a stimulus bill passed before the election combined with the renewed virus scare proved too much for the bulls to overcome.
Going forward, it is simply hard to accept the stock market maintaining this decline given the strength of earnings season so far. Unfortunately, only time will tell.
Volatility is the result of doubt and doubt we have.
We want you to feel confident in any market cycle. So, I will leave you with this vital investment truism-- Volatility is the cost of building wealth over time.
We are here for you, so do not hesitate to call the office if you have any questions or concerns. Have a great week, everybody!