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Current Views

Second Quarter 2020 | Equity Commentary

Market Overview

Stocks enjoyed a strong 2nd quarter, with the S&P 500 returning just over 20% for the period. We believe fiscal and monetary stimulus, along with improving economic data, helped to drive this rebound following a difficult start to the year. While we are encouraged by the litany of data points which suggest that economic activity has strengthened over the past few months, the rising number of COVID-19 cases across much of the country is disconcerting, and in our view remains a key risk factor for capital markets moving forward.

The majority of economic data released over the last several weeks suggest that after contracting earlier in the year, the economy has entered a recovery phase. Following a decline in April, retail sales rebounded in May with an approximate 17.7% advance. Household spending also grew by about 8.2%. Surveys of both the manufacturing and service sectors also improved in May relative to April, though at a more modest pace. Economic activity appears to have continued to strengthen into June, as regional Federal Reserve manufacturing surveys for the month showed robust gains, with the Empire, Philly, and Dallas surveys being particular standouts, to us. June’s progress was not limited to the manufacturing space, as consumer sentiment ticked up for the month as well. The Citi Surprise Index, which quantifies how actual economic data is faring relative to consensus expectations, has surged of late, marking an all-time high after having plunged to record lows just a couple of months ago.

In our view, these improvements are a function of fiscal and monetary stimulus initiatives, along with the release of pent-up consumer demand. Earlier in the year, social distancing mandates and lock downs, implemented in order to counter the spread of COVID-19, effectively shut down a significant portion of the economy. As states began to allow businesses to reopen, pent-up consumer demand, alongside direct payments to households and enhanced unemployment benefits, we believe helped to generate the upside economic surprises noted above.

While the US has provided trillions of dollars in both fiscal and monetary stimulus, we continue to believe that more needs to be done to support the economy amid the coronavirus pandemic. We think that state and local governments in particular will need additional federal support. This would help to mitigate the tax increases and reductions of services that would otherwise take place, dampening growth, as those entities seek to balance their budgets. Federal Reserve Chairman Jerome Powell has been consistent in his message in recent months that more fiscal support is needed in this regard. Moreover, while the Federal Reserve has intimated that it is willing to take further action, it is our view that it would prefer to wait for Congress to act first. We think that the Federal Reserve is also waiting to assess the path of viral transmissions and economic growth, and possibly for the results of its formal review of monetary policy strategy, tools and communications, which could inform any additional steps it may take.

As we look ahead, we are encouraged by the spate of improving economic data. However, the pertinent issue at the moment is the sustainability of the recovery. Our primary concern over the last few months has been the potential for another surge in COVID-19 cases to an extent which would impact economic activity. With numerous states now having paused or rolled back at least certain aspects of their reopening plans, it appears that that there may be some degree of economic impact, but to what extent remains an open question. With equity markets having had a strong run during the 2nd quarter, we think that stocks are implying a steady continuation of the economic recovery, which may be overly optimistic. We also worry that politics could delay or reduce the next tranche of fiscal stimulus that is expected in late July, ahead of the expiration of enhanced unemployment benefits and before Congress’ scheduled August recess. We have therefore recently taken actions to slightly de-risk our portfolios should the resurgence of the coronavirus ultimately derail the economic improvement seen in recent months.

We note, however, that we have not yet seen much weakness in the economic data from this latest spike in coronavirus cases, and there are other factors keeping us from taking an overly defensive posture for now. These include the potential for further fiscal and monetary stimulus, which we think becomes more likely the worse the spread of the coronavirus gets. While we will let the data inform our decision making, at the moment we feel that a bifurcated approach to portfolio construction remains optimal, whereby we are maintaining exposure to early cycle holdings that we believe will do well should the recovery prove sustainable, while at the same time keeping some defensive holdings in place to help guard against potential market declines in the event that there is a pause in the economic recovery.

 


 

This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.

Past performance is not a guarantee of future results. Indices are unmanaged and cannot accommodate direct investment. Themes assigned as per Roosevelt Investments’ evaluation. Risk tools may include cash or other securities that we believe possess a low or inverse correlation to the overall market.

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The Roosevelt Investment Group, Inc. is an independent investment management firm that is not affiliated with any parent organization. The Roosevelt Investment Group, Inc. manages equity, fixed income, and balanced assets for primarily U.S. clients. The Roosevelt Investment Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission and notice filed in all 50 states.

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