Readings were released this week on 2nd quarter GDP reports, and they were ugly. Despite being marginally better than expected, they still represent the largest drop since readings began by a large magnitude. Some of the figures released this week include the US at -32.9%, Germany -10.1%, Mexico -17.3%, and with other major nations reporting Friday. Aside from the underlying economic data, the biggest news was the congressional hearing in Washington with some of the largest and most profitable technology companies in the US. CEOs from these corporate titans have been under fire for years with regulators, who claim the scale of their operations and tactics used to dominate market share make them monopolistic. While that may very well be true, these companies are also largely responsible for positive returns this year in US equity markets, representing the largest concentrated share of the indices since the dotcom bubble. This alone presents a risk to the recent run up in equities, as hits to these leaders’ stock prices could provide a major catalyst for a selloff. Meanwhile, earnings season continues with roughly 80% reporting thus far beating estimates, though guidance is mixed due to the uncertainty of the virus.
The Federal Reserve also held their quarterly press conference this week, announcing no change to interest rate policy and pledging to continue to do whatever is necessary to support the economy. Echoing recent reads on unemployment, they have major concerns that the current crisis could have long-term effects on workers that could last years to come. This remains the biggest concern on our radar – that continuing unemployment claims have risen more than expected, with more Americans remaining unemployed for longer. Claims for benefits have been particularly acute in states where the virus has run rampant in recent weeks, such as California and Texas, and are not showing signs of improving. Next week we will gain more clarity on whether there has been a pickup in hiring, though doubts remain that employers are keen to add to the workforce with so much uncertainty. The economy looks to be stalling, with the much- vaunted V shaped recovery very much in doubt. Jobs are not returning in a significant way, particularly as consumers remain cautious about re-emerging from their homes with virus cases still surging higher. Wrangling in Washington over the next stimulus deal further adds to a dimming outlook, as benefits are necessary just to keep the economy afloat, which are set to end this week.
We have trimmed equities recently, given markets near the top of our estimated range for the near term and a stalling out of the economic rebound. Our belief is that stocks will remain elevated, however, but that upside from here could be challenging until fundamentals improve. Promising vaccine trials are underway, and a firming timeline on deployment or signs of controlling the virus’ spread could quickly return the economy to jumpstart conditions. Longer-term, which is our main focus, we believe equities will be higher in the years ahead as the economy and corporate profits improve over time. On that basis, we remain invested with a strategic overweight to equities versus fixed income. Select European markets, in particular, are looking attractive at this time, and we’re continuing to add to exposures there. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.