The first half of 2020 was a wild ride, whether you’re looking through an economic, public health, social, or market lens. For the stock market’s part, equities defied most expectations and are nearly flat for the year even as the economy remains mired in uncertainty. Many investors are wondering what to expect in the second half. Here are four key factors to watch:
1. The Shape of the Outbreak Matters, but Expectations Matter More
Reports in the U.S. point to rising cases, particularly in parts of the country that had once skirted the worst of the outbreak. The reach and pace of the outbreak remains a key risk in the current environment, but at this stage the biggest risk for markets is the risk of another economic shutdown. We are by no means advocating for or against a lockdown – our view is simply that another lockdown would almost certainly result in another major pullback for stocks.
As the outbreak unfolds and perhaps worsens, look for investor sentiment to anchor negative headlines. As expectations fall and fear rises, the economic recovery will have an increasingly lower hurdle to clear – and that could be good for stocks.
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2. More Economic Stimulus as a Tailwind
The Federal Reserve Chairman, Jerome Powell, has been vocal in recent weeks about his view on more economic stimulus: the U.S. economy needs it. Earlier in June, the Treasury Secretary echoed this sentiment, telling the Senate Small Business and Entrepreneurship Committee that he thinks the U.S. “definitely” needs more stimulus. House Democrats have already passed a $3.5 trillion version of another stimulus package, but Senate Republicans are so far resisting any stimulus package greater than $1 trillion.2
Either way, it appears at this moment that the U.S. economy could get more stimulus in some form in the coming months, and any stimulus is likely to play as further support for stocks, in our view.
3. Valuations That Seem High Can Go Higher
With the forward P/E of the S&P 500 at over 20, stocks may seem highly valued. But one factor investors should consider in the second half of the year is the role of interest rates on valuations. When interest rates are basically at the zero bound, the future value of earnings is higher. That means that valuations that once seem expensive at 20x or 25x may actually have more wiggle room on the upside, in our view. Traditional views of ‘high valuations’ may need to be adjusted even higher.
4. How Messy Will the Election Get?
We are politically agnostic at Zacks Investment Management – we do not prefer one party or leader over another. What matters to us is how policy changes may alter property rights or serve as headwinds or tailwinds for economic growth. The stock market and economy tend to be more resilient than any one political party, but policy ultimately does matter.
In 2020, we see more risks than a typical election year, for myriad reasons. The pandemic looms as a factor in voter turnout, and the temperature of the country (no pun intended) is on the rise. A messy and/or disputed outcome could be a short-term risk for stocks, and volatility in the weeks surrounding the election should be expected.
It may be hard to find the silver linings in the current
crisis, but that doesn’t mean they aren’t there. To help give you additional
insight into how you can make the most of turbulent times, I recommend reading
our guide “Using Market Volatility to Your Advantage.”4 This
guide can help you learn about our insights, based on decades of experience,
about how a volatile market may be able to actually help investors refine their
strategies and potentially generate solid returns over time.
You’ll get
our ideas on:
If you have $500,000 or more to invest, download this free guide today by clicking on the link below.
Disclosure