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Back in Black

US equities continued rallying in July as investors shrugged off weak economic data, political gridlock, and worsening COVID-19 virus trends.

The move higher extends what has already been a historic rebound. As of the end of the month, the S&P 500 is now positive year-to-date and up 44% from its March low.

Our Perspective

Today’s rapid market recovery stands in contrast to immense weakness in the economy. While we believe that a sharp rebound in business activity is happening, there is also a growing pile of evidence that the economic recovery is plateauing, weakening the case for further stock market gains.

July also marks the end of several key CARES Act fiscal stimulus programs that were so instrumental in keeping the economy afloat this spring. Per usual, Washington has struggled to find compromise, and should they fail to reach an agreement, a key stool supporting economic growth will be removed.

Worsening COVID-19 transmission, hospitalization, and death trends are also troubling. While rates are thankfully not at March/April levels, wave two risks are very much possible and remain a looming risk for the rest of the year.

There remains a tremendous amount of uncertainty underpinning the market rally. While we believe investors should look to increase risk during times of economic stress, the speed and severity of the market rally has driven valuations back to significantly elevated levels.

Winners and Losers

July’s earnings releases for the second quarter far exceeded expectations for most sectors and industries, substantially boosting to investor sentiment.

Per FactSet and as of July 31, 84% of S&P 500 companies have reported a positive earnings surprise, on pace for the highest percentage of positive surprises in the history of the metric.

Our Perspective

Of particular note were outstanding results by the major US-based mega-cap technology companies, whose continued strong performance further extends a multi-year run of strength.

While we see greater value in cyclical stocks today than we have in quite some time, we continue to own several growth-oriented names with strong business models and significant growth potential.

Answering Your FAQs

Last month, we provided our Mid-year Investment Outlook, an update on our views for markets and economies between now and the end of the year.

It was a volatile first six months of the year, and while our outlook covered a wide range of topics, we knew you would have additional questions.

We selected four questions we received that are representative of the questions we are seeing most often in our conversations with clients today.

For more, see our recent blog post, Answering Your Questions for the Rest of 2020.

Our View
Economic Cycle		Global economic growth reached deeply recessionary levels last quarter, but we believe the worst is behind as major global economies around the world open back up; economic growth is likely to settle into a trend below pre-crisis levels
Stock Market		An abundance of global liquidity and rising investor sentiment has led to a historically strong rebound in equities; valuations are again looking elevated, particularly against the wide range of risks within the market
Bond Market		Negative and ultra-low interest rates across the globe will remain a major challenge for long-term fixed income returns; credit spreads have tightened from peak levels, but still offer decent value
Foreign Exchange		While we believe the dollar may weaken longer term, with policymakers in nearly every major economy in the world engaged in substantial fiscal and monetary stimulus, it is difficult to make the argument that this will swing currencies significantly
Important Issues on the Radar		Coronavirus: focus has shifted to the pace of the economic recovery, although unemployment may prove stickier than policymakers may expect Trade Tensions: relations have been in decline for some time, and rhetoric is likely to become more hostile with both US Presidential candidates looking to take a hard stance on China Eurozone Integration:  stronger fiscal integration in the EU could be a significant positive for the currency bloc, although it is likely to be a long and noisy process to get there Inflation vs Deflation: the significant demand shock makes it hard to call for inflation, but the sheer size of fiscal and monetary programs around the world should be a cause for concern

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The US stock market mentioned within is represented by the S&P 500 which is an unmanaged, capitalization-weighted measure comprised of 500 leading U.S. companies to gauge U.S. large cap equities. The Index returns do notreflect any fees or expenses. Dividends are accounted for on a monthly basis. Index returns provided by Bloomberg. S&P Dow Jones Indices LLC, a division of S&P Global Inc., is the publisher of various index based data products and services, certain of which have been licensed for use to Manning & Napier. All such content Copyright © 2020 by S&P Dow Jones Indices LLC and/or its affiliates. All rights reserved. Data provided is not a representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and none of these parties shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

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