Clarity Out of Crisis
Look out for more fiscal policy stimulus in late July or early August. The market rebound has been nothing short of astounding but still remains disconnected from the general economic malaise we are seeing. The reopening hit a significant speed bump with the second wave of COVID-19 cases now plaguing most states, and this is translating into slower economic data in June. Markets will be looking for a second sugar high and if the government doesn’t act soon, we could see a dip in risk assets. What form the stimulus takes has been well telegraphed by the administration.
Both Mnuchin and Kudlow have focused on a more targeted approach. That could include aid to the states and certain industries more impacted by a second shutdown. They will also re-extend the PPP to provide business support, and consumer aid could come in the form of early tax refunds or a reduction in the payroll tax, as well as an extension of the emergency unemployment package. This fiscal package will total in excess of $1.5 trillion, thereby providing another two to three months of stopgap support for GDP. On the Federal Reserve side, we expect a broader approach with continued purchases of specific debt instruments and expansion of direct borrowing capabilities in addition to the continued rollout of the Main Street lending program.
With expected stimulus, markets should continue to rally, assuming second quarter earnings hold up and virus shutdowns do not accelerate. The wild card continues to be vaccine development, which has shown recent promise but still has a high degree of unpredictability. We have been trying to quantify the amount of money on the sidelines, which even after this tremendous rally appears to be in excess of $10 trillion. That will be a powerful tonic when the economic black cloud lifts. Negative surprises that have not been discounted include a resumption of the Chinese trade conflict and election risk.
We continue to focus our resources on finding companies that are able to show durability and growth during this crisis. While technology and healthcare have occupied most of our attention, housing is starting to pop up on our radar. Mortgage rates hit historic lows this week, which should drive a significant increase in existing home sales and new construction. The gap between supply and demand for homes never fully narrowed post-Great Recession, and we see opportunity for growth in this area. From an asset allocation perspective, we have had success with US Large Cap Growth over the last three years and are in the process of adding an International Large Cap Growth manager.
While this continues to be one of the most difficult investment landscapes I have seen in my career, our team has used this as a rallying point to enhance the durability and growth potential of our portfolios. As someone said so aptly, “Crisis creates clarity”, and we have been living that every day.
Please let me know if you have any questions via phone at 804-774-2087 or email at Jesse.Ellington@middleburgfinancial.com.
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