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This our second quarterly market commentary issued during the strange world of the Covid virus. Traditional methods to forecast economic and financial market trends are confounded with a virus that is so treacherous and unpredictable.

We expect that more definitive information will emerge in the months ahead. The best hope is for progress on treatments and a vaccine for the virus. Once we have that information, perhaps by time of our next newsletter, we should have better understanding of when the economy can start to normalize and how the market will respond. We should have more ability to forecast GDP, corporate earnings, and the trajectory for equity and fixed income investments.

At the moment, however, the outlook is highly mixed. U.S. economic activity and employment showed encouraging strength in May and June. But now the virus is raging and spreading in most states. We face the prospect of continued economic disruption and shutdown along with the usual uncertainty of a national election year.  One analyst described the stock market outlook as: “A Thrill Ride That May Go Either Way.”   

Given all the uncertainty, we are cautious and defensive at Hudson Advisors. We are not pulling client monies out of equities. But we are careful and selective on where we might commit new monies. We are helping clients to evaluate their liquidity needs. Our goal is to protect client assets at the same time we seek areas for future growth.    

The Economy: The U.S. lost over 20 million jobs in April and the unemployment rate had reached 14.7%. But employers brought back over 6 million workers in May and June and unemployment fell to 11.1%. This is good news for an economy highly dependent on confident consumers. That sentiment could be further bolstered if the Administration and Congress agree on another major stimulus package in the weeks ahead.

However, the new surge of the virus in the Sunbelt and other states is dampening that optimism. Major states such as Florida and Texas are slowing and reversing their re-opening plans.  Federal Reserve Chairman Powell is a prominent voice warning that economic rebound will be limited if governments and businesses cannot make people feel safe working or spending money indoors. Over 15 million people remain unemployed.  Their return to work will be stalled as long as the virus keeps raging. While forecasts vary, the U.S. GDP is expected to be negative for 2020.

The Market:  Investors have two major worries. First, over 200 companies in the S&P 500 have withheld their customary forecasts about how business will perform in the months ahead. Most analysts expect corporate profits to decline about 40% when 2Q earnings are reported. Second, the possibility of a Democratic takeover of Congress in November would mean likely rollback of the 2017 tax cuts – constraining corporate profits and hurting stock prices.

Given all these worries, some bullish analysts believe the stock market will look ahead a year or two until when the pandemic has run its course. U.S. equities will emerge stronger than other equity markets around the world. The power of the large U.S. technology companies will be significant. The contrarian bearish view is that stocks will follow the pattern of the Great Depression: initial crash, partial rebound, and prolonged slump as the challenges of economic recovery are recognized.

At Hudson Advisors, we believe the stock market most likely will trade in its current range for the rest of 2020 until the course of the pandemic is clearer and the outcome of the elections is known. As we enter 2021, we should know better whether the bullish or bearish viewpoints for the market will be more accurate.

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