The US market indices had their best week in three months, as the Dow (+3.3%), NASDAQ (+4.6%), and S&P 500 (+3.9%) exhibited strong gains, and now vaulting all three indices into positive territory for the year. Small caps also had a great week, as the Russell 2000 small cap index gained 6.9%. Corporate bonds remained relatively flat, while US government bonds and municipal bonds dropped about 0.3%. The stock markets are reacting favorably to the prospect that the Fed will provide additional stimulus to help airlines, small businesses and households. Given that the majority of Americans work for small businesses, and consumer spending represents nearly 70% of the economy, it is understandable why the stimulus package would be beneficial to the economy. However, my concern is that this may be a “sugar high” that we will eventually have to pay back in the form of higher taxes in the future. Another concern is that the US will be issuing more debt to cover these stimulus packages, and that will have an adverse effect on the dollar, as the value of the dollar would be expected to decline accordingly.
We are now about to enter Q3 corporate earnings season, and almost half of the companies are not offering full-year guidance for 2020 and 2021 earnings, owing largely to the uncertainty of the pandemic. To me, that is concerning, but also not surprising. I suppose I would rather have someone tell me the truth and that they don’t know, rather than providing me an inaccurate guess. I will certainly be interested in seeing how well corporations performed in Q3, and what their expectations will be for the future. After all, these earnings reports and expectations should represent the fundamentals of stock prices and the corresponding value of the stock market.
I also came across a chart (see below) that demonstrates job losses since January and their recovery across various industries. According to the chart, 60% of the remaining job losses are in industries that should recover with a vaccine.
Have a great day and week!