As a financial advisor focused on helping those working in the Pharmaceutical industry I've been getting a LOT of questions concerning the current state of the financial markets.
Will there be another down turn or will the market's improvement seen over the last few months continue? While I certainly don't have a crystal ball there are a few observations I've made to make my best guess at what the rest of 2020 could look like.
The Virus
Covid19, the catalyst to the first recession in 10 years, will continue to be a crucial component of the year moving forward. With the easing of lockdowns and more businesses opening their doors and returning to work the fear of a second wave, or a new spike in infections, is certainly a possibility. If this happens, and additional lockdowns are necessary another drop in the stock market seems highly likely.
The chances of this happening are hard to predict as there are many factors to account for, but predictions from the Institute for Health Metrics and Evaluation suggests both outcomes are possible and could vary greatly based on the easing of social distancing restrictions as well as if mask wearing is widely adopted and continues throughout the country. But hopefully with continued measures such as mask wearing the worst is behind us.
There is also the possibility that further advancements in treating the virus could lead to quicker economic recovery. In mid-June for example trial results from a study showed that a widely available steroid treatment could help treat critically ill coronavirus patients. Hopefully these life saving advancements will continue throughout the year.
Not to mention the immense hope around development of a vaccine. With the large number of Pharmaceutical companies working towards this goal I certainly wouldn't be surprised if we had some positive news about a successful vaccine. Even though I suspect it would not be widely available before the end of the year the knowledge of its success would likely have positive impacts leading into 2021. That said there are no guarantees and this will certainly continue to be an area of interest for financial markets.
The Economy
As we've seen throughout 2020 many companies have taken a huge earnings hit and have struggled in the areas hardest hit by the virus. To combat the shutdowns record levels of fiscal and monetary stimulus have helped soften the blow to businesses across the country. And in fact we have begun to see signs of improvement throughout the economy.
Unemployment has begun to decrease, dropping to 13.5% in May from its prior high of 14.7%, and again in June to 11.1% - though that number is still much higher than February's 3.5%. The question now is what recovery will look like and how long it will take for things to get back to its pre-covid19 levels.
Unfortunately, recent predictions by the Federal Reserve suggest we may have a long road ahead of us. In their June estimates the Fed predicts unemployment could remain as high as 9.3% and US GDP could fall by as much as -6.5% by the end of 2020. If this is the case we are far from being back to normal.
The Market
In contrast to double digit unemployment and Fed predictions of a slow economic recovery the stock market recently had its best performing quarter in two decades.
After a steep drop in February and March the S&P 500 jumped back quickly over the following months and has reached levels not far off from where they were at the start of 2020. In my personal opinion this could mean the market is over valued. While many would consider the stock market to be an indicator of the economy's overall health in this case I believe it is more of an indication of overall investor sentiment.
Investors appear to be very optimistic about the future of the economy, and have reacted positively to the large amounts of monetary and fiscal stimulus provided to support the economy. But if corporate earnings are down and unemployment is high there is potential disconnect the value of the stock market and the state of the economy. For example the price to earnings ratio, a common statistic used to gauge whether a stock may be overvalued, is at its highest point since the dot com bubble.
(Note: The S&P 500 index is unmanaged and you cannot directly invest into an index. Past performance is not a guarantee of future results.)
This is not to say that we haven't reached the bottom. I believe that as we move into the third and fourth quarters of the year we will see additional improvements in corporate earnings, unemployment, and the economy as a whole. But if this process is a long one, as the Fed is predicting it will be, a correction in the stock market before the end of the year is a real possibility.
Start Planning Today
I believe there is plenty of reason to be cautiously optimistic with the year moving forward. As mentioned there are many unknowns that could bolster the recovery including vaccines, medical advancements, and additional monetary or fiscal stimulus. But if recovery drags on longer then investors additional market volatility and a possible correction could be expected.
As always it is important that you evaluate your goals along with your investment risk tolerance. I believe that proper planning and keeping a diversified portfolio is a great way to combat the uncertainty of the future. If you are nervous and would like to re-evaluate your investments I would suggest you talk with a financial professional. In fact, why not talk with a financial advisor focused specifically on helping Pharma employees?
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Schedule a call with me and I'll help point you along the right direction.
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This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. The information is based on data gathered from what we believe are reliable sources. It is not guaranteed by Waddell & Reed, Inc. as to the accuracy and is not intended to be used as the basis for any investment decisions. The information presented does not constitute a solicitation for the purchase or sale of any security and is not a recommendation of any kind. Please consult your financial advisor before making financial decisions. (07/20)