The U.S. economy contracted 9.5% through the second quarter, the worst single-quarter decline in gross domestic product (GDP) since the Commerce Department started tracking it in 1947. It was expected the report would show a dip, but it’s important to recognize what that dip represents. It does not attest to the economy’s current trajectory, just the most stringent period of pandemic lockdown.

There are plenty of reasons to believe the third quarter will see a sharp rebound, though the specifics will likely be shaped by the coronavirus, as U.S. Federal Reserve Chairman Jerome Powell said. The Federal Reserve is committed to keeping interest rates low to at least 2022, Congress and the White House are approaching a deal for a new round of stimulus, and promising vaccine candidates have reached the third stage of trials.

Corporate earnings in the second quarter were relatively strong, with 81% of companies beating estimates. Additionally, many companies have begun providing forward guidance again after suspending guidance earlier in the year. And with stocks, we’ve seen a major rebound since the S&P 500’s low point in March, driven especially by the performance of technology and healthcare stocks.

The tale of two equity markets, one for technology and then everyone else, seems to continue. The NASDAQ Composite Index has outperformed the S&P 500 for 10 months. The S&P 500 has also been heavily bolstered by health care and technology stocks – though government stimulus and e-commerce have created bright spots among consumer discretionary stocks.

There are certainly challenges ahead of us – rising coronavirus infections, unemployment and U.S.-China relations – but many reasons to expect the second quarter GDP contraction to be short lived.

• Rising COVID-19 cases and weekly claims for unemployment benefits remain at high levels, which could be significant headwinds for recovery.
• GDP fell sharply in 2Q20. Weakness was widespread, but especially pronounced in consumer services, transportation equipment and energy exploration.
• Consumer spending figures for May and June showed a sharp, but partial rebound, but the future patch will depend on the virus, efforts to contain it and the amount of fiscal support.

 

Bottom line

• We believe the positives of global stimulus and low rates outweigh the potential negatives, Madere said. Though we expect volatility, moments of market weakness should be seen as an opportunity.
• There is reason to be watchful, but strong corporate earnings, positive vaccine news and a commitment from policymakers should alleviate broader concerns.
• Currently, the markets will be watching stimulus package developments in Washington closely, but after that, attention will likely turn to the November elections as candidates reveal policy plans.

As life continues despite seemingly massive challenges, We hope you are finding moments of joy and
that you and your families are experiencing good health and wellness. As always, we encourage you to
reach out to me if you have any questions, about the markets, your financial plan or anything else.
Thank you for your continued trust.

 

 

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of Raymond James and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
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