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Volatility returns on fear of virus rebound

JUN. 15, 2020


  • Investors are being reminded of the volatile nature of the current environment, as equities fell for the first time in four last week and are beginning this week on a negative tone. Equities had embedded optimistic assumptions on the reopening of the economy and the rebound in activity, but rising cases in notable areas is giving pause. Many of the high-beta industries that have led the recovery, notably small caps, airlines, energy, hotels and retail, are notably weak. Economic and market recoveries rarely are as clean as this one has been to date, and a consolidation following a remarkable recovery is not unexpected or unhealthy. This period is a reminder in the difficulty for investors to time the market given the degree of uncertainty and volatility.
  • Fed Chair Powell is set to appear twice this week in Washington and is expected to echo the cautious tone from last week’s FOMC press conference. His performance drew criticism from White House economic advisor Kudlow for being overly negative. High-frequency data, including cellphone traffic, employee time management and employment claims are steadily increasing, though there are substantial differences among states. Retail foot traffic last week was within 20% of 2019 levels, but only about a third of states have seen a full recovery. Sentiment indicators, such as consumer sentiment and NFIB Small Business, show a strong rebound, though most economic releases show caution. Markets embed optimism that we are in a recovery and are vulnerable to disappointing data.


  • Fear surrounding a rebound in coronavirus cases, with 25,000 on Saturday at the highest level in six weeks, though increased testing is clearly a contributing factor. Record hospitalizations, which are not impacted by testing, is being seen in several states and is critical to monitor. Chinese reported its largest daily increase in cases in two months, with officials in Beijing closing its largest fruit and vegetable market and locked down nearby housing following dozens of positive tests.
  • Election uncertainty is expected to be an increased source of volatility in coming months, as Joe Biden has overtaken President Trump in the polls and betting markets. RealClearPolitics shows Biden with an 8-point lead in the latest average of polls, while Predictit shows Biden with a 57% chance of victory, up from 44% a month ago. The uncertainty stemming from the increasing odds of a Democrat sweep is adding volatility.
  • White House trade advisor Navarro hinted at another coronavirus package of “at least $2 trillion,” roughly double what Senate Majority Leader McConnell wants, and about two-thirds of the House Democrat bill. The administration is leaning against extending the enhanced unemployment benefit, as it creates a disincentive to return to work, and is likely to focus on incentives to drive domestic manufacturing and infrastructure spending, while providing relief to distressed industries and individuals.

What to Watch

  • A relatively light week of economic data awaits, highlighted by retail sales and industrial production on Tuesday, housing starts on Wednesday and leading indicators on Thursday.

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  • This material is not a recommendation to buy, sell, hold or roll over any asset, adopt an investment strategy, retain a specific investment manager or use a particular account type. It does not take into account the specific investment objectives, tax and financial condition, or particular needs of any specific person. Investors should work with their financial professional to discuss their specific situation.

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