When it comes to financial markets, all eyes are on the latest happenings tied to the COVID-19 pandemic. Whether it’s weekly jobless claims, corporate earnings reports, global trade, fiscal policies or the potential for a vaccine, markets respond in stride.
Following unprecedented losses and the worst three-month decline on record in the second quarter, the U.S. economy rebounded at an estimated 25% growth rate in the third quarter, the fastest quarterly growth rate on record.
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Although there remains enormous uncertainty regarding the immediate future, it is important to remember that financial markets are forward looking and will anticipate an improvement in economic trends well in advance of the media.
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For 2019, world financial markets performed exceptionally well, with double-digit returns in virtually all major asset classes, including domestic and international equities, domestic fixed income, and precious metals. The 2020 investment landscape should become increasingly favorable as the year unfolds. Economic, financial, and policy trends should support another year of positive returns, although annual returns are virtually assured of trailing those of 2019, and by a wide margin.
In this edition of Economic Commentary, Robert F. DeLucia, CFA and Consulting Economist for MEMBERS Capital Advisors, Inc., provides a financial market review and landscape outlook and an annual investment review for 2020. Here are the highlights:
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Following growth of 3.1% in Q1 of this year, U.S. real GDP expanded at an estimated annual rate of only 2% in Q2. The slowdown can be attributed primarily to the effects of the escalating tariff war with China. Another factor at work: strong growth in household and service sector spending was partially offset by a weakness in manufacturing and business investment spending. Although the current U.S. economic expansion is the longest in American history (beginning in 2009), it still is subject to a basic principle of business cycle theory: Expansion cycles do not die of old age but rather because of spreading excesses and imbalances within the economy that undermine the economy’s natural tendency toward growth.
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Stock investors have been on a roller coaster over the past two years. As measured by the S&P 500 Index, stock prices rose by 20% during the six months ending in January 2018; declined by 10% over the next three months ending in April 2018; rose by 15% through the end of September; and plunged by nearly 20% through year-end 2018. Since the end of December, stocks have risen by nearly 25% to a level within 2% of the all-time peak reached on September 20.
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