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Mid-Year Recap

Monthly Insights Presented by Benjamin W. Jones, CFP®, AIF®
President, Chief Investment Officer, Principal

At the risk of stating the obvious, 2020 has been full of surprises. As the saying goes, life is what happens to you while you're busy making other plans. Never has this been more true than today. The world turned upside down in the first half of the year. Whatever plans we had went out the window as everyone shifted to the new reality. As dramatic as the current short-term impact is, 2020 will (hopefully) one day amount to a small blip in the history books. Blip as it may be, there will be lasting impacts on the world as our plans for the future may have permanently shifted.

As we enter the second half of the year, we now know more about the pandemic. But that doesn't necessarily make the challenges any easier. The goal remains managing the virus without creating devastating economic impacts. Unfortunately, we still have much to learn here.

The severe economic decline of the second quarter is now behind us. Each economic release supports our thesis that April was the low in economic activity and further supports our thesis of three distinct phases of the economic impact. As a reminder, the three phases are:
  • Phase 1 - The Severe Decline
  • Phase 2 - The Initial Bounce Back
  • Phase 3 - The Road to Recovery

Phase 1 is behind us, Phase 2 is occurring, and Phase 3 is at our doorstep.

The economic recovery of Phase 2 shows many parts of the economy bouncing back strongly. Just like monthly data set records on the way down, the near-term recovery is setting records on the way up as well. However, we do not expect this to be long-lived as it is mainly a function of the unprecedented shutdown and reopening of the U.S. economy. After the initial bounce back, we now expect a more gradual recovery to ensue as the country attempts to return to normalcy.

As we anticipated, the recovery is not occurring in a linear fashion and there will be more bumps along the way. The current resurgence of COVID cases throughout many parts of the country is creating a bumpy ride. We expect the economic recovery in COVID hotbeds to slow or reverse as regions enact stronger measures to fight the spread. However, some of the weakness will be offset at the national level by the northeast beginning to reopen. Suffice it to say, normalcy is still a while away.

The rise of COVID cases is concerning from health perspective but it also has significant impacts on regional economies. Recent research by the Allegiant team shows the strong relationship between consumer behavior and their confidence in the safety of the local region. In other words, regions with elevated new COVID cases have started to experience a rollover in activity over the last few weeks. It will take months for this to flow through to the official economic data, but it is a constant reminder that we need solutions regarding the virus before the economy can return to normal. This is precisely in line with our Phase 3 thesis, the road to recovery will take time and growth will slow as we continue to work our way through the pandemic.

While the recovery is choppy across the county, it also remains uneven among sectors. Some businesses have flourished (think certain technology, home delivery, and healthcare companies), while others have struggled greatly (think hospitality and travel). Even outside of the well-known sector differences, the S&P 500 is a microcosm of global big businesses that are better equipped to handle today's challenges. It is not a great representation of the U.S. economy. Looking below the surface of markets, things are not as good as they appear. The gains are driven solely by the large-cap growth category, while value stocks, smaller companies, and international companies tell a different story, one more aligned with the current economic challenges. This deviation provides opportunities for investors as the recovery progresses.

A quick V-shaped recovery appears out of the question at the moment. A resurgence of COVID cases throughout many parts of the country are beginning to hit confidence, which in turn is impacting activity. The recovery is here, but it will take time and will be full of fits and starts. However, consumers are chomping at the bit to get out and spend. Containing the virus, thereby increasing confidence, will eventually translate into increased activity. In other words, we're not out of the woods yet, but we are closer to the edge.

If you would like to see more data and charts about the economy and various financial markets, please click here to view our Monthly Insights book.

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