The resilience of the market continues to impress with the S&P 500 now sitting just below its pre-pandemic high. We believe this is especially true considering Congress' failure to reach a new stimulus deal amid continued economic stress and extreme levels of unemployment. The economy is seemingly improving at the margin with the number of new COVID-19 cases starting to fall, but we are still operating far from pre-crisis levels. Republicans believe this improvement warrants a reduction in the next round of benefits, while Democrats are pushing for a more robust package. For the market to make a new high, we will likely need to see a resolution on this front.
Off of the March lows, the market was carried by the strength in big tech and communications companies. These companies were set up to benefit from the stay-at-home trends brought on by the pandemic. In recent weeks, the momentum in this group has stalled and shifted towards companies levered to a re-opening. This change coincided with a peak in the virus and rising inflation expectations. We expect a cyclical turn is encouraging for the broader market and good news for strategies competing with increasingly concentrated indices.
Without a new fiscal deal, however, it is unlikely that the economy can sustain its recovery. Trump's executive actions offer a small buffer, but the economy needs more. There are still over 16 million Americans unemployed and relying on benefits that will be heavily reduced without a deal. This is a critical juncture for the market. Participants are reluctant to press many of the growth names further on valuation but are also skeptical about the economy's prospects. The combination of a deal and improving virus trends is a recipe for the market to continue grinding higher.
Joe Biden also announced his running mate this week with a pick that has seemed to be well received by the market. Kamala Harris is unlikely to push for some of the more extreme policy positions other candidates might have championed. Historically, we would expect the market to begin selling off at some point during August if Joe Biden were to go on to win. We don't see any signs of this yet but are only halfway through the month. As noted above, the key to a move higher is a deal. It is not lost on us that both of these things would be good for Trump. The election is far from a given.
Preston May, CBE®
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S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.