July 8 2020 Market Update

Markets are Rising: What About the Economy?

As we’ve discussed before, this might come as a surprise in the wake of continued economic strain for large numbers of Americans and growing COVID-19 infection rates. The US reported over 52,000 daily new cases going into the Fourth of July weekend, breaking previous records.^[2]

What does this mean for the economy?

A Window into Smaller Businesses

S&P 500 companies are certainly large and well known, but they don’t provide a descriptive barometer of the overall economy. One area this becomes very relevant is with jobs. The S&P 500 accounts for only 10 percent of non-farm jobs in the US economy, whereas small personal services businesses like hair salons and plumbers make up about half of US jobs.^[3]

These are, in our view, the jobs to watch.^[4] The US added 4.8 million jobs in June, far surpassing expectations. The unemployment rate fell to 11.1 percent (after adjusting for counting errors anomalies, the Bureau of Labor Statistics notes that the actual unemployment rate is about 1 percent higher). This news reflects reopening efforts across states in the middle of June. With more recent rollbacks and suspensions, it’s possible this number will stall a bit in the middle of the summer.

Another indicator to watch is new jobless claims, which remain high. 1.47 million Americans filed claims in the last week of June, while continuing claims increased by 59,000 to 19.3 million.

Two key factors for small and mid-size businesses over the next several months are the course of the virus and policy measures that could help tide businesses over. With caseloads rising rapidly across several states, including California, we could see continued volatility and pressure on small businesses and policy measures to stem the wave of infections. There may be additional monetary policy adopted to mitigate the impact of the virus throughout the economy.

A Paycheck Protection Program deadline extension was passed by Congress on July 1, extending the deadline to apply for aid until August 8.^[5] This could give businesses some additional relief through this period of uncertainty.

Implications for Investors

The market rebound is of course somewhat comforting to investors, especially given the high level of uncertainty around public health and the economy. That said, we do think it would be wise to prepare for at least some level of upcoming volatility – while markets and main street may seem completely dislocated at this time, this could change.

This could become particularly relevant if sentiment turns. After all, there are indications that the COVID-19 crisis may continue to unfold apace, which could affect market sentiment over the coming months. Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Disease, testified to Congress that the US is “not in total control” of the disease, and that infection rates could top 100,000 per day if current trends continue.^[6]

What form an economic recovery will take remains uncertain. At this time, with caseloads rising and a pause on reopening plans across several states, we could see a start-stop situation over the coming months.^[7] Currently, the US economy is operating at about 65 percent of “standard” expectations.^[8]

We will continue to monitor the situation both on an economic level and how it impacts the markets. The markets will be driven far more by positive or negative headlines than by fundamentals. As we’ve said before, this situation is one of the key reasons we recommend a diversified portfolio. It’s difficult to know what to expect even in the easiest of times, and a prudent, diversified strategy can help you navigate uncertain ones with more confidence. However, if you believe you will require liquidity in the next six months, please check with us to ensure you have ample cash reserves set aside, especially after the strong market rally in the second quarter.

As always, we encourage you to reach out to us with any questions, comments, concerns, or just to check in.

JSF Financial