In today’s Steady Investor, we look at key factors that we believe are currently impacting the market and what could be next for the markets such as:
Steep Q2 GDP Declines Across the World – Developed countries felt the pain in the second quarter, with economic activity contracting steeply across the board. According to the Organization for Economic Cooperation and Development (OECD), the combined economic output of its 37 members (which are all relatively wealthy countries) fell -9.8% quarter-over-quarter, which marks the worst decline in output since records started in 1960. For context, the largest decline produced by the Great Recession was -2.3% in 2009, which pales in comparison to the Covid-19 impact. Here in the U.S., the Bureau of Economic Analysis released its second estimate of Q2 GDP, indicating a -31.7% annual rate of decline coming off a -5.0% decrease of real GDP in Q1.1 It may be hard to believe, but there is actually good news in these numbers. For one, they are all backward-looking, which means they have basically no effect on the economy or markets going forward. Second, a steep contraction usually offers easy comparisons for a growth rebound, which we believe we will see in the third quarter.
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How to Protect Your Assets in the Next Bear Market
The pandemic ended what was the longest bull market in history and caused what could be one of the shortest bear markets. And while it may be over, volatility is likely to persist for some time. This year has proven just how quickly things can change. That’s why there is no better time for investors to gain a better understanding of bear markets and how they work.
To help you understand market downturns and steps you can take to protect your assets during the next bear market, you’re invited to get our free guide – Everything You Need to Know About Bear Markets.2
If you have $500,000 or more to invest, get this helpful guide today. It walks through the history and types of bear markets, how investors typically react to extreme volatility, and what we can learn from the history of bear markets and pandemics.
Download – Everything You Need to Know About Bear Markets
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Inside the Fed’s New “Flexible Inflation Targeting” – Fed Chairman Jerome Powell gave a speech this week that marked a material shift in the Federal Reserve’s monetary policy strategy (and goals). Chairman Powell indicated the Fed would be implementing a “flexible form of average inflation targeting,” which is a convoluted way of saying that the Fed will pursue an average 2% inflation target over time. The underlying implication here is that the Fed is now increasingly willing to allow inflation to drift above 2% for “some time,” given that inflation has been running under that target for such a sustained period.3 That’s where the ‘average’ comes in. The Fed’s stance means, in our view, that we can expect to see sustained low interest rates for at least a few years and possibly more asset purchases in the near to medium term. Until the unemployment rate falls back to a near ‘maximum’ level – call it 3% – we can reasonably expect accommodative monetary policy.
Housing Market Strength Continues Apace – The U.S. economy is recovering steadily – if not a bit unevenly – but one area that continues to demonstrate durable strength is the housing market. Perhaps this trend was to be expected in the wake of the pandemic, as people seek out bigger spaces for working and schooling at home and migrate out of city centers. Sales of new single-family homes jumped 14% month-over-month in July, hitting an annual pace of 901,000. This strength in the housing market puts it at a level not reached since before the housing bubble burst in 2005. Interestingly, much of the new growth is being driven by millennials, who previously had been reluctant to enter the housing market as family formation lagged and as renting was favored. For the first time, millennials accounted for over 50% of new home loans. Supply of homes remains tight and prices are rising.4
Global Trade Keeps Sinking – The United States’ revived embrace of protectionist policies started a tailwind against global trade that has been accelerated by the pandemic. Global trade dropped by the most in 20 years as supply chains were compromised and demand for consumer and investment goods waned. Corporations are also rethinking supply chains in the wake of the pandemic, which ultimately contributes to one-third of total trade. A European Bureau of Economic Policy Analysis showed that the flow of goods across borders was 12.5% lower in Q2 from Q1.5 The path to recovery for global trade is less clear than economic recovery on the country level.
At the beginning of this year, we were still in the longest
bull market. But the pandemic led to what could be one of the shortest bear markets in
history. This year has shown us just how quickly the stock market can change
and proven just how critical it is for investors (especially those in or near
retirement) to know how bear and bull markets work.
To
help you understand market downturns and steps you can take to protect your
assets during the next bear market, you’re invited to get our free guide
– Everything You Need to Know
About Bear Markets.6
If you have $500,000 or more to invest, get this
helpful guide today. It walks through the history and types of bear markets,
how investors typically react to extreme volatility, and what we can learn from
the history of bear markets and pandemics.
Disclosure