Second Quarter GDP Report Reflects Early Pandemic Response
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.
• 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.
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