Jason Thomas: Market Update

Second Quarter 2020

Finding a path forward.

Jason Thomas, Ph.D., CFA

Chief Economist

AssetMark, Inc.

The story

The first quarter of 2020 was one for the record books. As it turns out, so was the second quarter. The S&P 500 soared over 20% during the quarter (almost 40% since the March 23 low) despite the historic stress felt in the real economy. Skeptics of the rally pointed to the massive intervention by the Federal Reserve and the US Treasury, arguing that the equity market was being artificially propped up and economic weakness ignored.

So, economists (including the Federal Reserve staff) were caught flat-footed when the May employment report showed a massive 2.5 million increase in jobs. Expectations were for a decline of over 8 million. The June report released today showed an additional 4.8 million jobs added, well above expectations, on top of an upward revision of 2.7 million to the May gains.

The reality

Given the speed and magnitude of the economic contraction that started in March, economists expected the eventual recovery to start with a sharp upturn. But states began to reopen earlier than expected, before some of them met the four federal reopening criteria (symptoms should be declining, new cases should be declining, the positive test rate should be below 10%, and at least 30% of ICU capacity should be available).

Initial indications are that the reopening was too early and too broad – the US reported over 50,000 new cases on Wednesday, the fifth single-day case record in eight days. While increased testing may be part of the story, other metrics – the number of hospitalizations, the percent positives – confirm that the virus is spreading in almost every state. As of July 2, only Vermont, New Hampshire, and New Jersey (3% of the population) meet all four recommended federal gating criteria. Five states (15% of the population) meet none and another 11 states (24% of the population) meet just one.

Over Half the Population Has Seen Reopening Reversed or Halted

Population-Weighted Share of States Modifying Reopening Policies

As of 7/1/20. Source: Goldman Sachs Global Investment Research.

The bottom line

Our national experience over the past several weeks is either terrifying or encouraging, depending on your perspective. The lack of commitment to federal guidelines from policy makers and the public has resulted in a tragic surge of virus cases. On the other hand, data suggests that face covering is surprisingly effective at limiting the spread of the virus. The mandated use of face covering might even serve as a substitute for shelter-at-home orders.

The widespread availability of a vaccine remains sufficiently distant that we must find a way to resume economic activity in a responsible manner. While our track record isn’t good, our momentum seems to be in the right direction.

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C20-16253 | 07/2020 | EXP 07/31/2021
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Jason Thomas is also Chief Executive Officer & Chief Investment Officer of Savos Investments, a division of AssetMark, Inc. Savos Investments is a division of AssetMark.

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