This week, the U.S. stock market began a new rollercoaster of volatility. For investors who were not fully emotionally-recovered from February and March, this brought back unwelcomed queasiness. Many are wondering how significant this latest market decline is, and what it could indicate for the weeks and months ahead. So far, we are nowhere near the level of declines seen earlier in the year. However this week evoked fears of a Double Dip or a “W” shaped recovery and created a few frightful news media headlines.
The recent stock market decline was led by drops in some of the largest technology companies, which make up a significant percentage of the current S&P 500 index. Keep in mind it was precisely these tech stocks which soared to all-time highs in our current market rally. In fact, just five companies in the S&P 500 index with average year-to-date (YTD) return of approximately 48% lifted the entire index to break-even territory, despite many companies within the index continuing to be down approximately 5% YTD.[i] Mid-week, Apple shares fell more than 6%, while Facebook and Amazon were down more than 4%. Microsoft slid 5.4% and Netflix closed 1.8% lower. Alphabet (Google) lost 3.6% of its value.[ii] However, this week’s drop is a small fraction of the 50% rally since the March 2020 low.
Recently, we’ve struggled with the disconnect between the current state of the U.S. economy and the stock market, which has climbed back to record highs. The recent, although brief selloff, appears to be from day-traders who have begun to feel less optimistic or are taking short-term profits off the table. It is impossible to predict if this could turn into panic or if the market will resume its climb.
What we do know is that the unemployment rate is continuing to decrease. The jobs picture has improved for the fourth month in a row. However, that still means roughly 8.5%[iii] of Americans continue to be out of work, which is not good for the overall economic recovery.
We also know that the Federal Reserve Board, is committed to keeping interest rates low through 2021. The Fed is steadfast on the stabilization of the U.S. markets. Congress is currently debating another round of relief for Americans. Although the $500 billion “skinny” coronavirus package did not pass this week, it is believed this could reinvigorate negotiations about a larger $1.5 trillion COVID relief bill from the White House. With the upcoming election, Democrats and Republicans alike would benefit from passing another substantial aid package to Americans in need.[iv]
There is great uncertainty about whether we will see a resurgence in the COVID pandemic. We have seen South Asia, Australia and Europe successfully stave off a second COVID wave from wide-spread contagion. Further, a COVID vaccine could help Americans get back to “normal” by summer of 2021.
With a November election around the corner, anxiety is at an all-time high, for good reason. Tax reform and the budget for government programs like Medicare and Social Security will be the focus once control of the Senate and a President is determined. It is likely that many or all of these factors will continue to create volatility in the stock market through the end of the 2020.
Investors shouldn’t be surprised if and when the stock market pulls back from our current record highs. If the past is indicative of the future, what we have learned from prior market declines is that the U.S. is resilient. In every instance, through wars, recessions, and even pandemics, the market has eventually recovered from downturns to post new market highs. The next bear market, whenever that may come, should be no different.