June 15, 2020
POTENTIAL PATHS FOR STOCKS IN THE SECOND HALF
Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial
Ryan Detrick, CMT, Senior Market Strategist, LPL Financial
Stocks staged perhaps the strongest rally in history—a more than 44% gain for the S&P 500 Index from March 23 through June 8—before pulling back about 6% late last week. With so much economic healing ahead of us and a still-uncertain path for COVID-19, the key question for investors is whether stocks are pricing in an overly optimistic scenario for the recovery in economic activity and corporate profits.
MARKETS REFLECT A LOT OF OPTIMISM
Our expectations for a gradual economic recovery in the second half, discussed here last week, appear to be in conflict with the stock market’s rapid ascent over the past 12 weeks. On one hand, gains appear appropriate based on the likelihood that the recession—officially declared on June 8—may be the shortest ever, aided by the massive stimulus response by policymakers and initial progress toward a vaccine.
On the other hand, the risk of a second wave of COVID-19 remains, particularly as some southern and western states have seen increases in infections and hospitalizations. In addition, some of the 20 million jobs lost in March and April as reported by the Labor Department will take a while to come back due to social distancing constraints and potentially lasting changes in consumer behavior.
The uncertainty around these paths suggests stocks may have come too far too fast. Although some recessions see stocks quickly recover bear market losses (1980, 1990), most of the time the journeys back to record highs take a year or more [Figure 1].