Stocks staged a remarkable recovery during the second quarter, gaining back much of the losses investors experienced at the onset of the coronavirus pandemic. We are grateful but a bit suspicious, given the magnitude of challenges that our economy is facing. Many businesses either remain closed or are just beginning to reopen, often at a limited capacity and with additional health precautions. In addition to the pandemic and related economic shutdown, recent weeks brought widespread civil unrest around the country. Reactions to the protests have further divided an already tense electorate. At a minimum, the images of looting, destruction and violence are contributing to the acrimonious tone for November’s Presidential election.
We have not yet eliminated the risk posed by the COVID-19 virus. The number of confirmed cases has surpassed ten million worldwide, with roughly a quarter of them occurring here in the United States. It is possible that millions more have already been infected by the virus without developing anything more than mild symptoms, while a small portion of the population is at risk of serious complications. Roughly half of all the fatalities from COVID-19 in the U.S. have been suffered by people in nursing homes and assisted living communities. Better understanding of the illness should lead to more reasonable precautions to limit the spread of infection, especially to more vulnerable individuals. In the meantime, research labs around the globe continue to work on vaccines, treatments and a means to successfully contain the virus.
Shutting down the economy worked to “flatten the curve” of coronavirus cases to an amount our healthcare system was able to handle. However, that humanitarian victory came at the expense of our economy, and we now have an enormous number of people out of work. Roughly 40 million people in the U.S. lost their jobs. The full impact of that historic setback was buffered by a federal program to provide checks and other financial assistance to individuals and small businesses. That program is slated to end this month. Extending the benefits may prove difficult, as the spirit of cooperation in Congress appears to have waned in the wake of recent protests and the upcoming election. According to the Bureau of Economic Analysis (BEA), our economy shrank by five percent during the first quarter of 2020. That was prior to the full shutdown, and we believe the second quarter figures are going to plumb the depths of this recession. The economy is back on an upward trajectory, although we expect it will be difficult to reach the extraordinary levels of employment that our nation achieved prior to the pandemic.
The Federal Reserve has been the unsung hero during this crisis, and it is hard to overstate the important role they have played in stabilizing capital markets. They moved quickly to lower interest rates and provide trillions of dollars of programs to support every aspect of the financial system. Their efforts have shored up everything from mortgages to municipal bonds, commercial paper and other corporate debt, as well as consumer borrowing for student loans, auto loans and credit cards. The average interest rate on mortgages has come down to roughly 3.5 percent, prompting a surge in refinancing that will relieve pressure on homeowners. State and local governments, employers and households have all benefited from the Fed’s timely actions.
For better or worse, economics and politics are deeply intertwined. The government’s role in our economy has escalated during the pandemic, literally to the point of telling citizens when they are allowed to leave their homes to go to work. For the sake of safety, people have relinquished a great deal of their personal freedom. It is an experience that seems likely to alter the habits and political views of a generation of voters. We are living through one of the most formative moments of our nation’s history. After a dramatic primary season, Joe Biden has secured the Democratic nomination and will soon pick his running mate to challenge the Republican ticket of Donald Trump and Mike Pence. Political campaigns are now hyped like prize fights, and this one promises to be an epic brawl. The first of three Presidential debates is scheduled for September 29 in Indiana. As campaigns shift into high gear, we expect some headline risk that could cause additional volatility for financial markets.
The coronavirus has imposed profound change on the direction of 2020. In a few short months, our work, leisure and social relationships have changed. The stock market recovery in recent weeks suggests Wall Street is optimistic that the economic setback will be temporary. We believe this is a moment that will call upon the best of all Americans, because the path ahead does not look easy.
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