What We Are Watching: 8 Market Impacts
Now that the official start to summer has arrived, I always have the same thought. Why do the days have to get shorter? I love these long summer nights the best. In a twisted way, I dread the longest day of the year, because now I know every day will get shorter and shorter. I almost prefer the shortest day, as I know each day will get longer.
Oh well. Guess I’ll take my own advice and try to simply enjoy these long days while they last!
Recently, I’ve been getting many perplexed clients all asking questions about what the stock market’s been doing. Why is it almost fully recovered, despite everything going on? In a past blog, I gave the reasons we’re seeing such a recovery so quickly in the markets. There’s no question that I (and everyone else at Diversified) am happy this is the case, as we’re responsible for a lot of client assets (over 600 million as of 7/8/2020).
But as we all breathe a sigh of relief (even if temporarily), the question looms—are we in the clear? Well, our perspective is one of caution. There’s still a lot of uncertainty out there and we’re keeping our eye on a lot of economic factors. Below are the eight items we’re most cautious of in the ensuing months. Any of these may have an impact on domestic and global markets.
1.COVID-19 the second wave – This is likely the biggest market threat out there. It seems most health experts expect this to happen. Of course, we hope we’re more prepared next time around and thus the damage won’t be as bad (or as unknown). I’ve heard colleges anticipate no students coming back after Thanksgiving break. Still, we’re keeping a close eye on what’s happening both domestically and globally on the Covid front.
2. Corporate earnings abyss – The world shutting down wasn’t good for many businesses. Owning stocks is essentially partaking in the growth, or not, in these companies. Stock prices are generally driven by underlying earnings, expectations of earnings, and growth projections. Many companies are deciding against giving earnings guidance for the rest of the year, as so much is still unknown. We’ll get some more clarity on this once companies start reporting second-quarter earnings.
3. Unemployment – We know unemployment hit record levels with this global pandemic. Normally, unemployment this high would cause a state of panic. The assumption, however, is many of these jobs were lost temporarily, but we don’t have a full grasp on which jobs were lost permanently and where unemployment will buoy. As the world normalizes, we should have a better sense of its impact on the economy/markets.
Election year – Election years always bring some form of uncertainty and unease. To say this election is shaping up to be one of the craziest in a long time is an understatement. There are several policies in place that can be unraveled. Not that we believe who sits at 1600 Pennsylvania Avenue is the be-all-end-all in the markets. However, it’s quite a pivotal time in our country’s future.
5. U.S. and China trade tensions – This is of major economic concern. It seems every week there’s a new massive development on these two nation’s trade front which can have major impacts on the equity markets of the United States, China, and the world. It’s a fascinating case study playing out in front of our eyes. Let’s not forget 4th quarter 2018, we had a nearly 20% drop in the equity markets on this threat alone.
6. U.S. Government debt – It’s no secret we keep printing money at an alarming rate, and it’s not the first time. What is unclear, as this is unprecedented stuff, is what the back end looks like. Hyperinflation? Debt wars? No big deal? It’s yet to be determined, but to think this won’t come into play in some regard is simply foolish. We’re keeping a close eye on how this impacts both equity and bond markets.
7. Brexit – I feel like Brexit is the little brother who’s like, “Hey, remember me!?” Why yes, Brexit we do, and once upon a time you were a massive story that caused one of the worst market days we’ve seen in decades. Now, these market gyrations seem to be a normal occurrence and we’ve become numb. Also, Brexit hasn’t actually gone into effect yet. But when it does, it promises not to be little any more.
8. Fundamental shift in industries – Last, but certainly not least, the world has changed forever. Of this I’m certain. Raise your hand if you see working from home, at least in some capacity, normalized for most industries moving forward? (I had my 2nd virtual doctor’s appointment today, and let me tell you, beats the heck out of of sitting in a doctor’s office. Oh, and guess what? The doctor was on time!) It’s our strong belief that this event has created a shift in business. Certain trends and industries will emerge, and others are already gaining traction. We might be witnessing the next great revolution. The winning and losing companies will shape the markets for years to come.
I’ve been playing a lot of crazy eights with my five-year-old daughter these days. She’s getting pretty good, although she hasn’t learned to save her eight’s. Above are my saved eight, and while there are many other items we’re watching, these are probably the biggest things currently swaying markets. I encourage you to read our very own CIO Mike Horwath’s weekly market commentary, which speaks more granularly as to what we’re seeing. Feel free to reach out if you want to be added to our email list.
Until next time, as the famous song from Grease says: Enjoy those long summer nightttttttts, tell me more, tell me more.