Social justice, equality, personal safety and property rights appropriately dominated headlines this week. For the first time since mid-March, COVID-19 and the economy where no longer the lead story. Whatever your political persuasion, one cannot help but be saddened by the sum total of events of the last week. While we now turn to discussing the markets and the economy, let that in no way lesson our sympathy for the human tragedy which has unfolded in our country.
An Optimistic Start for Global Reopening
Against a backdrop of continued global economic reopening and monetary support from the Federal Reserve, the market continued to rally. This helps us look past what will most certainly be a truly awful second quarter from an earnings and economic data perspective to a more hopeful future.
While it’s still early, states that have completely or partially reopened in the U.S. have not shown “spikes” in COVID-19 infection, encouraging other states to continue with their opening plans. In Europe—especially Italy, which was at the center of the European crisis and spent eight weeks in lockdown—the outbreak seems to have passed. While China and Japan have seen some limited increases in infection rates, testing and tracing, coordinated with more limited lockdowns, seems to be restraining broader outbreaks. While news on reopening looks good, the friction associated with restarting the economy means it will take time to get back to trend levels of growth. As such, the Federal Reserve is still creating extraordinary amounts of liquidity.
The Fed Continues to Take Action
There is an old adage, “don’t fight the Fed,” which has been going around a lot. It means that given the Fed prints money and sets short-term interest rates, whatever they are trying to do is likely to get done. In this case, the Fed is trying to reflate asset prices by flooding the system with liquidity. Liquidity, also known as “cheap money,” is a powerful stimulant for financial markets. So while the economic data looks dark in the near term, the markets are counting on cheap money to get us through.
Geopolitics Is a Mixed Bag for Markets
Geopolitically, the world has also had some interesting developments this week. In Europe, increased cooperation amongst the EU states for issuing bloc-wide bonds has given pause to naysayers regarding the European integration project. A truly integrated Europe that shares a common banking and budgeting system, as well as currency, has always seemed unlikely. And yet, over the last few days, cooperation amongst major powers, especially Germany, has reopened possibilities. European integration is critical because it will unlock the combined spending and monetary power of the wealthiest trading block in the world. Think about how much prosperity has been created in the U.S. by our federal union—Europe has only captured a small portion of the union dividend.
Moving to China, the news isn’t as bright. The crackdown on Hong Kong’s semiautonomous status (called “one country, two systems”) and the U.S. response will continue to inch the two great powers of the 21st century towards a cold war. China and the U.S. are already attempting to create independent and rival geopolitical, trading and technology spheres of influence. Competition can be healthy, but much of the prosperity of the last 30 years has come from increased globalization. Cutting the two larger economies off from one another is likely to be harmful to global growth for years to come. We will be watching these developments closely.
We hope that you and your family are safe and taking time to reflect on things that matter to you most in these difficult times. In the end, money is not an end unto itself, but a vehicle for creating the future you want. In times like these, reflecting on your values and the future you want is of paramount importance.
Series 7 & 24 Securities Registrations,1 Series 66 Advisory Registration † Jim brings significant financial services experience along with the investment management industry’s best thinking and best practices to his role as Chief Investment Officer of Wealth Enhancement Advisory Services. Throughout his professional career, Jim’s philosophy on investing has centered on providing clients with...Read More