Jason Blackwell, CFA, CAIA®
Chief Investment Strategist
July 1, 2020
As schools shut down this spring, many students missed out on a lesson often taught in physical education classes: how to dance the box step. Forward-side-together; backward-side-together. Coming into June, equity markets and public policy makers had taken bold first steps forward and the economic data and COVID-19 data were following along. However, this month it became clear that these early moves were likely just the first steps in what will be a complicated dance that includes steps forward, to the side, and back.
Back in March, we highlighted an article entitled “The Hammer and the Dance” where the author argued that we would need to take a hammer to the virus through strict social distancing like we saw in late March and April. After the initial phase, public health officials could begin to experiment with relaxing social distancing to a point that balanced keeping the reproduction rate, or spread of the virus, sufficiently low with societal economic and social goals. This second phase was titled “the dance.”
In June, evidence began to suggest that some states may be moving too quickly and are being forced to either pause or reverse course. Over the last several days, the number of daily new cases has accelerated and eclipsed their April peaks. While we acknowledge that testing capacity was lower in April than now, increased testing does not fully explain the recent spike. Hospitalizations, which are a clearer measure of system stress than confirmed cases, are also on the rise. There is little appetite among policy makers to return to full social lockdowns. Even so, we expect that businesses that rely on congregating larger groups of people will go through fits and starts as public officials find the right balance between the social, economic, and health impacts of re-opening.
A similar dance is occurring within the economy and equity markets. From the market’s bottom on March 23rd through May 31st, the S&P 500 returned +36.6% – a giant step forward. Like a good dance partner, economic data followed closely, highlighted by the report that the US economy added 2.5 million jobs in May (the consensus forecast was for a loss of 7.5 million jobs). In June, however, unemployment claims continued to climb, beyond what was expected by forecasters. These relatively weaker numbers were contrasted by stronger than expected pending home sales and increasing consumer confidence. In the last two weeks of June, stocks danced back and forth with the economic data but settled close to their starting position.
For now, we anticipate that the dance will continue as markets attempt to stay synchronized with the spread of COVID-19, public policy responses, and the impact on the economy. At times, it may feel like we are effortlessly waltzing across the ballroom as economic data and stock prices coordinate their steps. However, until COVID steps off the dance floor, it may feel more like the 2019 craze, the Triangle Dance, where COVID, the economy, and investors try to coordinate their moves and seemingly move nowhere.
While the beat of the economy remains uncertain, we believe a diversified portfolio that can adjust to the music remains key.