Predicted V shape recovery yet to materialise as many economies around the world prepare for a second coronavirus spike
US GDP fell over 30% in the second quarter as markets falter
- The markets have been bracing themselves for the worst ever set of US quarterly GDP, with the figures falling by 32.9% during Q2
- As there are seemingly further waves of this virus, the strong recovery in activity is showing signs of faltering
- I believe that corporate earnings in the weeks and months ahead will lead the market to reassess valuations, or at least not stretch valuations any further.
The markets have been bracing themselves for the worst ever set of US quarterly GDP numbers and in that regard our expectations have been fulfilled, with the figures falling by 32.9% during Q2. This was not as bad as the feared 34.5% fall that was expected. The initial reaction to the data was muted given the dovish stance taken by Jerome Powell last night.
However, as the day progressed, markets went into selling mode as the more recent weekly jobs data (1.4m new jobless claims is quite the opposite of a recovery) supported evidence of a slowing in the recovery. Meanwhile, Trump’s tweet about delaying the election and his attempt at deflecting from the poor economic data only put more fear into the market.
Commentators who suggested a strong V shaped recovery on evidence of the initial data from the trough will now (if not already) be adjusting to a shallower angle of the recovery part of the V.
As we had believed earlier, this crisis will be longer lasting than many had previously thought and we’re only at the early days of the economic fallout. As furlough schemes end and more people get laid off, it’s natural to expect consumers savings rates to increase. On top of this, the divide between the Republicans and Democrats on the next round of fiscal stimulus and unemployment benefits will only reduce incomes of those out of work. This will hit consumption going forward. However, a huge amount of Government and monetary stimulus since the start of the crisis has resulted in a disconnect between the stock market and the economy, and I believe that corporate earnings in the weeks and months ahead will lead the market to reassess valuations, or at least not stretch valuations any further.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.