The introduction of massive government stimulus and a steady deceleration in the pace of overall new confirmed cases of coronavirus contributed to a strong rally in stocks from late March through April, as equity investors looked through a continued deterioration in the near-term economic outlook. The +12.8% S&P 500® gain in April was the best monthly return since January 1987. Current equity investor enthusiasm is pinned on anticipation that within the next 6-12 months the coronavirus outbreak is contained, more resources will be available to deal with the pandemic, and economic conditions are improving. Under such a scenario, pent-up demand, inventory restocking, and stimulus measures will likely spur a bounce in economic activity in the second half of 2020 and into 2021. Nonetheless, as many states planning to reopen in the coming days/weeks have yet to satisfy White House guidelines for doing so (i.e., achieved a steady reduction in case counts/new infections over the prior 14-day period), there is a heightened risk of a “second wave” in the pandemic. Even with a wholesale end to restrictions, we believe the economy may recover in fits and starts, leading to sustained financial market volatility and investor preference for high-quality growth stocks.
In terms of the economic outlook, we now estimate real GDP will contract about -4.5% in 2020, versus our pre-pandemic expectation of +2.0% growth, but acknowledge considerable unknowns that limit a high degree of precision. Economic data will remain gloomy near term, and some industries – notably travel, dining, and entertainment – will feel the effects of the virus long after it is contained. Given the -4.8% seasonally-adjusted annualized decline in first quarter 2020 real GDP and our expectation for a -25% decrease in the second quarter, a sharp “technical” recession is inevitable. However, absent a reintroduction of restrictions, we also project GDP will increase +5% in the third quarter and +10% in the fourth quarter. The anticipated recovery in economic activity in the second half is supported by unprecedented federal stimulus which is estimated to represent nearly 35% of GDP.
Sit Mutual Funds will continue to operate at the highest level during this outbreak, and we invite you to contact us with questions or concerns. You can reach us at 800-332-5580 or email us at firstname.lastname@example.org. We will continue to post updates about market and economic developments on our website at www.sitfunds.com.