Zacks Investment Management

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:

• What could the US economic recovery look like?
• Inside the harsh reality for US manufacturers
• Could lower consumer and business expectations be a good thing?

The Nike-Swoosh-Shaped Economic Recovery? Market-watchers and economists have been eyeing China’s economic recovery. Since China was the first country to run through the cycle of the pandemic (shutdowns, restriction on movement, gradual reopening), economic data from China can be useful for projecting how a gradual recovery may look in the U.S. and elsewhere. The takeaways are mixed, but not dire: Chinese factory profits fell by -36.7% in Q1 and the economy suffered its worst quarterly decline in decades, but the sharp drop-off was followed by a sharp bounce-back to pre-virus factory activity.¹ The main issue was that China’s economy returned to a world where demand had collapsed, such that even a resurgence in economic activity did not result in a snapback of sales, deliveries, and trade. Because the entire world is riding the same wave and demand is only likely to creep higher over the next several months, we might reasonably expect that the economic recovery looks more like a Nike “Swoosh” than a “V.” The good news, in our view, is that we have likely already reached the lowest point of economic activity for the crisis, so the gradual climb upwards is arguably underway. The question is, what will the rate of recovery be?

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How to Use Market Volatility to Your Advantage
 
Current market volatility is challenging for just about every investor, especially with all the unknowns that come with the current pandemic. But for all the worry and discomfort volatility often causes, did you know there are also several positive aspects of volatility?
 
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• How market volatility can “shake up” complacent investors
• Potential bargains that may be uncovered through turbulence
• Why volatility may help prevent overheating and market “bubbles”
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A Harsh Reality for U.S. Manufacturers – Stories are starting to emerge around the country of factories shifting from furloughs to outright closures. It’s difficult news to digest, particularly for those whose jobs are being eliminated and may not return. The factory closures are adding up from a dishware maker in North Carolina to a cutting board maker in Michigan, a Polaris jet ski manufacturer in Indiana, and a factory that produces furniture foam in Oregon. The harsh reality for many of these manufacturers, however, is that the Covid-19 pandemic may simply be accelerating an event that would have occurred anyway in a matter of time. Since the late 1960s, the United States has been losing manufacturing jobs in a steady decline. The globalization of supply chains has been a major factor, but the US economy has also been evolving from an industrial economy into a services, consumption, and technology/information-based economy over the same period. ³ Many companies are using the tragic moment to speed up strategic shifts that may have been inevitable.

U.S. Manufacturing Employment Has Been in Steady Decline

Expectations are Falling, and That May Be a Good Thing – US consumers and small businesses are lowering their expectations for a strong economic rebound. In April, Americans’ views on the job market and personal finances declined dramatically. More Americans than ever were worried about losing their job, while a record number also had low expectations for future earnings, income, and spending. Similarly, the small business optimism index recorded its biggest two-month decline in the index’s history, with a majority of small businesses around the country not expecting a rebound for at least six months.⁵ All this pessimism may be a good thing. When it comes to equity markets, one of the major drivers of future returns is whether the actual economic outcome exceeds expectations. As expectations fall, the bar is lower for the economy to surprise to the upside, which can help push stocks higher. In this sense, investors should root for dire sentiment, as it builds the “wall of worry” stocks historically love to climb.

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.”⁶ 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:

• How market volatility can “shake up” complacent investors
• Potential bargains that may be uncovered through turbulence
• Why volatility may help prevent overheating and market “bubbles”
• What history shows us about opportunities for steady investors in turbulent markets
• Plus, more ways you may be able to benefit from a volatile market

If you have $500,000 or more to invest, download this free guide today by clicking on the link below.

Disclosure