Second half

   By Guest Blogger Ryan Lewenza

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“It’s tough to make predictions, especially about the future.” – Yogi Berra

I love this quote from famed baseball player Yogi Berra. Over the years I’ve had to make a lot of investment calls and this quote has often come into my mind as I make these predictions, recognizing just how hard it is to consistently make the right calls. This is why I tell clients that if I can go 6 for 10 in our calls and investments that that’s a decent batting average and we can likely deliver on our stated return objectives. Well, since I’m a glutton for punishment, it’s time to pull out my crystal ball and provide my expectations/predictions for the second half and highlight what I expect will be the key drivers of the markets for the remainder of the year.

Here it goes…

First, I believe the equity markets could consolidate through the summer months and trade in a range. For example, I see the S&P 500 potentially trading in a broad range of 2,700 to 3,300 through the summer months. Of course I’ll take the gains if the markets giveth, but I think it would be healthy for the equity markets to consolidate their recent strong gains over the historically weaker summer months. This would allow the markets to rebuild “internal energy” and set us up for a nice year-end rally. After all the crap we’ve had to endure this year wouldn’t that be nice!

Our Expectation for the Second Half

Source: Stockcharts.com, Turner Investments

The first big driver of the equity markets in the second half will, no surprise, be the US/global COVID infection and death rates. We’ve seen a marked increase in US infection rates, in large part driven by surging infection rates in some of the southern states like Texas, Arizona, and Florida. Florida alone hit over 10,000 new daily infection cases this week. Either the virus is moving south or this is the fallout from those state’s looser restrictions and quick reopening plans.

Below is a chart of the number of new reported COVID cases in the US, which after peaking in April, has surged higher in recent weeks. The daily rate has increased to 40,000/day and Dr Fauci this week predicted the potential for 100,000/day of new cases. This is not a good trend at and something we’ll be monitoring closely.

New Reported COVID Cases in the US

Source: NY Times
Next up will be the economic data. We’ve seen a nice turnaround in some key economic releases over the last month and as the economy continues to reopen I see a continued improvement in the labour market and other arears. This week we got the critical US nonfarm payrolls report, which showed 4.8 mln jobs were added in June, and the unemployment rate dropping to 11.1% from 14.7% in March.

Additionally, we saw a huge turnaround is the US manufacturing sector with the ISM manufacturing index jumping from 43.1 in May to 52.6 in June, now indicating expansion in the manufacturing sector. The rebound in the auto sector would have contributed to this nice turnaround in the manufacturing sector with total US domestic auto production falling to 1,800 cars in April, just a tad below the average of 230,000 cars per month.

While it won’t be a straight line, I see the economic data generally improving in the second half and into 2020, which if correct, will be supportive of the equity markets. The key risk to this is the virus and infection rates, so this is no slam-dunk call.

US Unemployment Rate and ISM Rebound in June

Source: Bloomberg, Turner Investments

The third potential driver of the US equity markets in the second half will likely be the US election in November. We covered this in detail in our last blog, where I showed that the S&P 500 has historically done better under a Democratic president (57% average return over the 4-year term), than a Republican president (26%). So if the polls turn out to be right this time and Biden wins, then based on history, this could be a positive thing. That said, I expect some market volatility as we near the election in November, given the uncertainty around who will be the next US president.

S&P 500 Performance under Different Presidents

Source: Bloomberg, Turner Investments

The last key thing I’ll be focusing on will be any additional government stimulus announcements. There is talk of a second round of fiscal stimulus in the US, with proposals for another one-time $1,200 payment to individuals, Trump’s pushing hard for a payroll tax, and some are shooting the idea around of a jobs/infrastructure bill.

I believe all the government stimulus (monetary and fiscal) is one of the key drivers of the equity markets right now. Below I illustrate this overlaying the Fed’s expanding balance sheet and the S&P 500. The Fed’s balance sheet has exploded from US$4 trillion to start the year to now US$7 trillion. For those bad in math, that’s an increase of US$3 trillion in stimulus in just a few months. Incredible! What’s a trillion dollars between friends? And given the strong correlation between the Fed’s balance sheet and the stock market, this may have something to do with the roughly 40% recovery since March.

Fed’s Balance Sheet and S&P 500

Source: Bloomberg, Turner Investments

There you have it. I see US infection rates, economic data, US election and government stimulus as the major drivers for the US equity markets in the second half. It’s going to be a bumpy ride but I see the potential for more gains coming later this year when all is said and done.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.