Balancing between optimism and worry 4 Aug 2020 As the world emerges from the initial health-related shock of the COVID-19 pandemic in the first-half of 2020, it is about to witness the economic and financial aftermath of the crisis as dire economic numbers and earnings for the first-half begins to roll-out.
These numbers will shed light on the state of the global economy, how well companies are faring during this crisis, as well as how the gradual path to recovery will look like for the considerable months and years ahead.
While there are plenty of information to be digested and major events that could move the market in either direction, hopefully the mystery that was in investors’ minds about the “disconnect between the market and fundamentals” may be unraveled.
United States
The U.S economy ground to a halt for almost the entirety of April.3 Now the world is about to find out the depth of that contraction. Gross domestic product from April to June plunged 32.9% on an annualized basis, according to the Commerce Department’s first reading on the data released on 30 July 2020.18
This is the worst plunge in records dating back to the 1940s, after the spread of the Covid-19 prompted Americans to stay home and states to order widespread lockdowns.3
Amidst the grim GDP numbers, signs of recovery are starting to show in other economic indicators while some are seen stalling as surging virus cases threaten recovery. Pending home sales surge for the second consecutive month in June, rising 16.6% monthly since May, and rising 6.3% since June 2019. For 2020, existing home sales are expected to decline by only 3% while new home sales are projected to rise by 3%.4
U.S manufacturing sector regained momentum, but the resurgence of domestic infections, alongside very weak demand, supply chain disruptions, historically low oil prices and high levels of uncertainty will weigh heavily on business investments.5 The U.S consumer confidence for July also missed expectation.6
Covid-19 cases in the US
The U.S continues to lead in new daily confirmed cases and despite trending downwards from almost 70,000 daily cases to below 60,0007 as Florida, California and Texas rolled back reopening plans, early signs of rising infection in the Midwest states of Ohio, Indiana, Kentucky and Tennessee are showing signs of impending danger.8
Source: https://coronavirus.jhu.edu/data/new-cases
Earnings season
As earnings season continue to unfold, numbers have generally come in better than expected – reflecting the effects of unprecedented stimulus from Congress and the US Federal Reserve. Almost four-fifths of the S&P 500 companies that had provided quarterly updates had posted earnings per share that were above analysts’ expectations and in aggregate, were reporting earnings 13 percent above estimates.2
Large tech companies had reported strong earnings with the tech-rich Nasdaq Composite Index led the major indices, winning 1.5 per cent to end at 10,745.27. The Dow Jones Industrial Average added 0.4 per cent at 26,429.06, while the broad-based S&P 500 gained 0.8 per cent to 3,271.26.17
Tech giants Amazon, Alphabet, Apple and Facebook all reported better-than-expected results after the market closed on 30 July, validating surging valuations built on expectations. The tech sector would be a big winner amid the pandemic upheaval.17
Federal reserve FOMC meeting
In the latest FOMC meeting which concluded on the 29th July, the Federal Reserve left interest rates near zero and vowed to use all its tools to support the recovery from an economic downturn that Chair Jerome Powell called the most severe “in our lifetime”. It also reiterated its pledge to increase its holdings of Treasuries and mortgage-backed securities over the coming months and extended its dollar liquidity swap lines and the temporary repurchase agreement facility for foreign and international monetary authorities through March 31, 2021.1
Powell also mentioned that supporting the recovery would need help from both monetary and fiscal policy, in a nod to ongoing negotiations among lawmakers and the Trump administration in Washington refreshes taxpayer support as the earlier assistance run out.1
Congress Stimulus checks & jobless benefits
The US stimulus package of $600 unemployment check which was supposed to last until January 2021 had expired on 31 July 2020. Although the $600 unemployment benefit might return in some form, the economy continues to struggle, and this lapse with the federal unemployment program just adds much more pain and suffering to an already dire economy.
Since March, more than 54 million employees have filed new jobless claims, and thousands of these workers report that they have yet to receive their first unemployment check (neither the regular state unemployment check nor the $600 enhanced federal unemployment benefit). For 19 straight weeks, there has not been one week where fewer than a million new jobless claims have been filed.10
After slowly declining, jobless claims have been on the rise for each of the past two weeks. This means that despite all three of the coronavirus stimulus packages that have been infused into the economy, businesses and organizations were already laying off more and more employees.10
U.S Presidential election
One hundred days before the presidential election, Joe Biden has built a commanding and enduring lead over Donald Trump, whose path to victory has narrowed considerably in the months since the coronavirus pandemic began. In a Washington Post-ABC News July poll, Biden led Trump 55% to 40% among registered voters, contrasting with March when Biden and Trump were locked in a near tie.9
Before the pandemic, Trump’s goal was for a sustained pace of 3% economic growth. Now, the coronavirus has left its own mark on Trump’s economic legacy -- with the declaration of a recession and the worst quarterly GDP decline on record.
With big lead in polls, Biden shifts search for a vice president running mate, and would likely pick a woman though it is unclear whether it will be a black woman as pressures mount. At 77, he is in line to be the oldest president ever, raising doubts about whether he’ll seek a second term. His vice president would have a leg up to succeed him.11
US-China tension heats up
In a run up towards the U.S presidential election in November and given the degree to which opinion polls appear to suggest how far behind Donald Trump is, the world’s two largest economies appear set to dial up their exchange of sharp language though whether it will be followed through with deed and actions remains to be seen.12
Diplomatic relations between the U.S and China have sunk to their lowest level in decades. In addition to trade war, there is the origin of the coronavirus pandemic, China’s move to implement a national security law in Hong Kong, as well as the recent shutting of U.S consulate general in Chengdu as well as the closure of the Chinese consulate in Houston.12
China
China’s provinces showed positive signs of growth in the first half of the year, offering fresh evidence of an economic recovery in the second quarter amid ongoing risks from the coronavirus pandemic and increasing geopolitical uncertainty. As of 20th July, 11 of China’s 31 provincial-level jurisdictions had published economic results for first half of 2020, with all of them showing a strong improvement compared to the first quarter.14
In another sign of economic recovery, China’s steel imports top exports for the first time since 2009, with exports from India, Japan, South Korea and Vietnam set for short term gains as demand overshoots supply in the rapidly recovering economy and benefiting China’s Asian partners. The unexpected strong increase in domestic demand for steel has been driven not only by infrastructure projects and the property market but also from shipbuilding, car and home appliances manufacturing, all of which have rebounded. Chinese producers are also hoarding inventories in anticipation of future shortages.16
The provincial data mirrors the national picture, which showed the country as the world’s first major economy to report positive economic growth and the optimism is being reflected in the Chinese stock market as it closes in on US$10 trillion milestone after its biggest crash. The US$10 trillion level also marked the top of the bubble five years ago in 2015 before it popped, as investors piled into stocks using borrowed funds.15
Similarities between now and then have started to displease policy makers who have taken steps to rein in stocks, and the authorities appear keen to engineer a steady bull market. However, leverage this time is barely half the level of its 2015 peak while valuations are still relatively cheap compared to other stocks globally and the upward trend remains intact.15
Having avoided a recession and with concerns looming of creating excess debt and financial bubbles, China has started to ease up on the emergency monetary measures it used to support its economy in response to the outbreak but it’s not expected to abandon monetary stimulus altogether but adopt a more targeted and structured approach to stimulus in the second half of 2020 instead of a continued broad relaxation of monetary stimulus.
Europe
The pandemic has plunged the eurozone economy into a historic recession with Spain suffering the biggest hit.21 The euro zone economy has been weighed down heavily in the second quarter by the stringent lockdowns in major Europe cities to prevent the spread of Covid-19. This has caused a record contraction more severe than the US however the success in avoiding a resurgence of the disease coupled with aggressive government stimulus should help support a nascent recovery. The eurozone’s gross domestic product fell 40.3% on an annual basis, far exceeding the 32.9% contraction in the U.S. economy over the same period.19
European governments are countering the recession with massive stimulus measures. EU leaders have agreed on a €750 billion recovery fund backed by common borrowing to support the economy from 2021. National governments have stepped in with loans to keep businesses afloat and wage support programmes that can help pay workers’ salaries. The European Central Bank is pumping €1.35 trillion in newly printed money into the economy, a step which helps keep borrowing costs low.20
Vaccine development
There are more promising signs from ongoing efforts to develop a vaccine that’s effective in preventing COVID-19: Two early trials, one from the University of Oxford, and one from a group of researchers in Wuhan showed efficacy in increasing the presence of antibody responses to SARS-CoV-2, the virus that leads to COVID-19, in their early trials.22
On the other hand, Moderna in partnership with National Institutes of Health emerged with positive data on a potential vaccine as well. It's the first vaccine tested in the U.S. to publish results from its trials.23
It is very early to make too many assumptions about what these early trials indicate. For instance, we still don’t really know how effective antibodies are in patients that have recovered from having COVID-19 once, so a lot more investigation is required by scientists in better understanding the efficacy of antibodies, and potentially vaccines, over the long term.22
Gold
Economic and geopolitical uncertainties have pushed gold prices to a high of $1,943.92 per ounce, soaring by almost 30% this year and at a nine-year high as investors seek safe havens while central banks and governments roll out monetary stimulus packages.13
Given the current momentum and the cloudy outlook ahead, analysts believe that gold will cross the $2,000 mark in the next few months.13
We hope that as you watch intently on how the impact of the coronavirus would unfold in the following weeks and months along with how your portfolio value would fluctuate with each positive and negative development, don’t forget to stay calm and stay invested. Don’t forget your investment objectives and remain focused on what you wish to achieve with your investments when you started.
If you are still unsure when to invest, one good way is to invest in smaller tranches or set up a Regular Savings Plan (RSP) on dollarDEX to smooth out the volatility and take the emotions out of investing. It is also important to have a diversified portfolio to avoid concentration risk in a particular sector or region.
YOU MAY ALSO LIKE THIS
Sources:
1. https://www.bloomberg.com/news/articles/2020-07-29/fed-leaves-rates-near-zero-repeats-vow-to-use-all-of-its-tools?sref=hVq0pA1j 2. https://www.ft.com/content/c6aeb749-d46e-4e70-b8a3-336592d6834a 3. https://www.bloomberg.com/news/articles/2020-07-29/u-s-is-about-to-unveil-the-ugliest-gdp-report-ever-recorded?sref=hVq0pA1j 4. https://www.cnbc.com/2020/07/29/pending-home-sales-surge-for-the-second-consecutive-month.html 5. https://www.cnbc.com/2020/07/27/durable-goods-orders-june-2020.html 6. https://www.cnbc.com/video/2020/07/28/us-consumer-confidence-for-july-misses-expectations.html 7. https://coronavirus.jhu.edu/data/new-cases 8. https://www.npr.org/sections/coronavirus-live-updates/2020/07/28/896152597/midwest-could-see-surge-in-covid-19-cases-unless-states-are-more-careful-fauci-w 9. https://www.theguardian.com/us-news/2020/jul/26/donald-trump-joe-biden-us-election-polls 10. https://www.forbes.com/sites/terinaallen/2020/08/01/the-600-unemployment-check-is-no-more-heres-the-reality-on-the-ground/#3552f1e11160
11. https://www.latimes.com/politics/story/2020-07-24/big-lead-shifts-biden-running-mate-search 12. https://www.cnbc.com/2020/07/24/us-china-rhetoric-will-be-scary-through-to-election-jim-oneill-says.html 13. https://www.cnbc.com/2020/07/27/gold-prices-could-top-2000-this-year-analysts-predict.html 14. https://www.scmp.com/economy/china-economy/article/3093954/china-provinces-show-strong-signs-second-quarter-economic 15. https://www.straitstimes.com/business/companies-markets/chinas-stock-market-closes-in-on-us10-trillion-milestone-after-its 16. https://www.scmp.com/economy/china-economy/article/3095045/china-turns-net-steel-importer-june-economy-recovers 17. https://www.businesstimes.com.sg/stocks/us-strong-tech-earnings-lift-stocks-nasdaq-15 18. https://www.cnbc.com/2020/07/30/us-gdp-q2-2020-first-reading.html 19. https://www.wsj.com/articles/eurozone-economy-contracts-by-record-40-11596191720 20. https://www.thehindu.com/business/Economy/eurozone-economy-contracts-a-record-12/article32242787.ece 21. https://www.ft.com/content/c45cf867-2821-4d3a-ab48-0bc809f8cf26 22. https://techcrunch.com/2020/07/20/covid-19-vaccine-trials-from-the-university-of-oxford-and-wuhan-both-show-early-positive-results/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAH4hOVgDJEznHEmK_1JpFM5S-0lKiw_-zKnfu6h84657WDfku2hxEftK3BV7MsdRAX8JO3RtWZ-upevoThs_YoLmu-57U7VgjC9IcRU_yMU5bHqlBZ9tOt8Lp_UyjDFtvFwIBLzNLv88eMR8o6jSSYh9OpNj1gFmjjkqc5Ct3ZMm 23. https://www.usnews.com/news/health-news/articles/2020-07-14/modernas-potential-coronavirus-vaccine-produces-positive-early-results
Disclaimer
All information here is for GENERAL INFORMATION only and does not take into account the specific investment objectives, financial situation or needs of any specific person or groups of persons. Prospective investors are advised to read a fund prospectus carefully before applying for any shares/units in unit trusts. The value of the units and the income from them may fall as well as rise. Unit trusts are subject to investment risks, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currencies should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance. dollarDEX is affiliated with Aviva but dollarDEX does not receive any preferential rates for Aviva products as a result of this relationship. Unit trusts are not bank deposits nor are they guaranteed or insured by dollarDEX. Some unit trusts may not be offered to citizens of certain countries such as United States. Information obtained from third party sources have not been verified and we do not represent or warrant its accuracy, correctness or completeness. We bear no responsibility or liability for any error, omission or inaccuracy or for any loss or damage suffered by you or a third party (including indirect, consequential or incidental damages) arising in any way from relying on this information.
This information does not constitute an offer or solicitation of an offer to buy or sell any shares/units.
Information is correct as of 12/08/2020.
|