In lieu of our usual Weekly Bulletin, we are publishing special reports to discuss the market reaction to evolving news on the coronavirus outbreak. We would stress the following observations as developments continue to unfold.
Stocks and other risk assets continue to be supported by massive government stimulus with recent economic readings suggesting a synchronized global economic expansion is beginning as the global economy reopens. The unprecedented fiscal and monetary stimulus now stands at over 28% of global GDP, including fiscal stimulus of $13.1 trillion and central bank liquidity injections of $11.4 trillion. Here in the U.S., fiscal support amounts to $3.3 trillion with another $1 trillion or more expected to be approved by the end of July. The Federal Reserve remains historically active with monetary policy and announced last week that they will expand on their unprecedented purchases of corporate debt from just exchange-traded funds to now include individual credits.
This extremely accommodative Federal Reserve monetary policy has led to a significant recovery in corporate bond prices and has allowed for over $1 trillion in investment-grade corporate bond issuance this year—more than twice the year-earlier pace. In addition, high yield, or non-investment grade issuance, is up more than 50% from last year, at $180 billion. Financial market improvements lead real economy improvements and this enhanced corporate liquidity should prove to be a major support for the economic recovery that is now unfolding.
We remain encouraged by the incoming economic data that suggests a strong recovery is unfolding as the economy reopens. Last week’s economic readings showed retail sales rose a record 17.7% in May over April while manufacturing conditions are showing improvement—in sympathy with the improvement in final demand. As a result of the better-than-expected incoming economic readings, estimates for third-quarter economic growth continue to rise and suggest a strong rebound in economic activity.
We are also encouraged by improvements in global economic conditions. China was the first country to lock down and was the first to reopen. Their retail sales and industrial production readings are suggesting a strong economic rebound is underway. The Eurozone ($4 trillion or 30% of GDP) and Japan ($2 trillion or 40% of GDP) have even more fiscal stimulus in place than the U.S. and their economic readings are also suggesting a strong recovery is underway.
The recovery in U.S. and global economic activity should lead to a recovery in corporate profits. This should support U.S. and global stock prices as we move into the back half of the year. We continue to favor the Technology and Health Care sectors of the economy. Many of the Technology sector’s secular growth drivers have accelerated as a result of the pandemic—including ecommerce, cloud computing, cybersecurity, and advanced communication (led by the move to 5G). Aging demographics remains a key long-term secular growth driver for health care.
We also favor high-quality firms that have sustainable, growing dividends. With the Federal Reserve stating that interest rates will remain low for the foreseeable future, investors will continue gravitating toward high-quality dividends as an important component of portfolio returns.
To be sure, there are risks to the strong economic recovery narrative. The path of the virus is the obvious one and we are seeing infection rates rise as the economy reopens. This could lead to new lockdowns or consumer/corporate caution. The November presidential election poses additional risks for stocks. The Tax Policy Center’s analysis of Biden’s economic proposals indicates higher corporate taxes would be likely. In our opinion, this would reduce corporate profitability. Trade tensions with China are another source of potential market volatility.
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