Weekly Investment Update

US equity markets, as measured by the S&P 500 index, declined 5% last week[1] as fears of the potential for a “second wave” of COVID-19 cases increased.  Most of the decline for the week occurred on Thursday when the S&P 500 was down nearly 6% from the previous session; it was the worst day for the index since March.  According to data compiled by Johns Hopkins University, several states including Arizona, California, Florida, and Texas are experiencing increased infections.  Despite the increase in regionalized “hot spots” the total amount of confirmed new virus cases in the US continues to trend lower. 

However, for several weeks after the late March bottom, stocks rallied nearly 50% as investors were seemingly hoping for successful virus mitigation and a quick (“V-shaped”) economic rebound.  Chart 1 shows the price of the S&P 500 index relative to expected earnings of its underlying companies over the subsequent twelve months.  As of mid-June, this measure of stock market valuation had gotten into expensive territory, likely because investors were giving less consideration to the lower earnings expectations of the next twelve months, and instead looking forward to more optimistic expectations for earnings in 2021 and 2022 (Chart 2).

Chart 1: S&P 500 Price-to-Expected Earnings

Chart 2: S&P 500 Historical & Expected Earnings

Markets tend to overshoot to both the upside and the downside, particularly during periods of extreme volatility like we’ve witnessed in 2020.  The reality is that the current recession may ultimately be less bad than the extreme pessimism implied in March, but the recovery may take longer than implied by the optimism of April and May.  Given the fluidity of the situation surrounding the pandemic and its potential to impact the global economy, heightened market volatility for the foreseeable future would not be surprising.  While it is nearly impossible to predict how the circumstances related to COVID-19 will evolve, we remain optimistic on recent medical developments as well as fiscal and monetary stimulus.

Key Economic Releases This Week

Asset Class Returns

Prices & Interest Rates