As we concluded the first full quarter of economic fallout from the coronavirus pandemic, stock values were generally higher, with large company stocks up 20.5%, smaller company stocks up 25.4%, and foreign stocks up 14.9%. Bonds, broadly measured, rose by 2.9%. These returns have an impressive luster in part because they are measured relative to the market trough of late March. Overall stocks remain lower for the year.
Many economists credit the launching of several giant government stimulus and lending programs, as well as a variety of aggressive Fed actions, as primary catalysts in rebuilding investor confidence, which drove the rebound during the quarter. While the markets finished up for the quarter, wide swings were common as investors toggled between optimistic and pessimistic outlooks. The hoped-for flattening of the virus infection curve, promising vaccine development news, state reopening plans, and business earnings announcements (which in some cases were better than expected) were all factors driving market gyrations.
The economy and the stock market are related but distinct. The economy refers to the production and consumption of goods and services, while the stock market is an exchange for shares in public companies. The stock market has historically functioned as a fairly reliable “leading indicator” of the economy. If it is correct this time, the optimists may be right that the worst of the immediate economic impacts of the pandemic have passed, and an economic recovery is already on the way (with unemployment normally being among the last pieces of the economy to recover). There has been much discussion about the various potential “shapes” of the economic recovery, including V-shaped, U-shaped, W-shaped, L-shaped, and “swoosh” shaped.
The optimists believe the economy will have a V-shaped recovery, suggesting a steep decline in economic activity quickly followed by a nearly-as-steep recovery. The U-shape would suggest a longer-period of lull at the bottom. The W-shape is a short-term recovery followed by a second decline, before the ultimate recovery. The L- shaped shows a long period of economic woe at the bottom before a distant eventual recovery (the worst outlook), and finally the swoosh-shaped is similar to the L, though the recovery comes along rather slowly. Even economists have different opinions on the most likely scenario.
In June, Federal Reserve Chairman Jerome Powell said that the economic shock caused by the coronavirus pandemic has exposed a range of “troubling inequalities,” most of which predated the current crisis. He further stated that it was important for policy makers to pay attention to how the national economic statistics can gloss over disparities, including how broader prosperity has eluded certain racial or ethnic minorities, according to the Wall Street Journal.
The Economic Policy Institute reports that white Americans have seven times the wealth of Black Americans on average. Black people make up nearly 13 percent of the US population, though they hold less than 3 percent of the nation’s total wealth. Low wealth is generally associated with diminished opportunity. “As the national discussion continues, it is critical to remember that equity includes access to education, work, and economic opportunity,” said Mr. Powell.
Socially responsible investors are mobilizing to increase commitment to Black economic opportunity. Natural Investments has for many years, and for most clients, directed bond investments into the Community Reinvestment Act (CRA) Qualified Fund. On behalf of shareholders, this fund has taken action on the issue of Black economic equality with a program to amplify its efforts to advance social justice, improve in the lives of those in historically marginalized communities, and increase economic opportunity for people of color. Natural Investments clients together hold over $15 million in this fund.
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