US stocks look to rebound from Monday’s up and down day. US markets are near flat early as market participants weigh the significance of the economy likely turning the corner over the second half of the year against the impact of additional restrictions in some states due to the recent surge in COVID cases. Most major Asian and European markets followed the US lower overnight.
Bond flows continue to dominate stocks. After pulling back in the first quarter of 2020, flows into bond mutual funds and exchange-traded funds (ETFs) dominated stocks in the second quarter, as they’ve done 15 of 18 quarters since the start of 2016 according to ICI data. While bonds remain an important part of a diversified portfolio, returns going forward are likely to become more muted due to low yield levels and the potential for an economic recovery. For more on bond and stock flows, see today’s LPL Research blog.
Midyear Outlook 2020 launches today. LPL Research’s Midyear Outlook 2020: The Trail to Recovery reviews where we’ve been in 2020, where we may be heading, and the path that will take us there. Our special elections section explains how stocks and the economy may predict the next president. View the interactive digital version. The highlights:
US economy. The trajectory of the economic recovery remains uncertain, but based on the depth of the contraction and a multi-staged recovery, our 2020 base case forecast calls for a 3–5% contraction in US gross domestic product (GDP).
Global economy. We expect economies in Europe to contract more than the United States or Japan in 2020. So far, China has led the way out of the global crisis in terms of containing the virus and reopening its economy.
Stocks. Stocks already are pricing in a steady economic recovery beyond 2020 that may be supported if we receive breakthrough treatments to end the COVID-19 pandemic. However, the optimism reflected in stocks also may limit their upside potential over the rest of the year. Our upwardly revised 2020 year-end S&P 500 Index target range is 3,250–3,300, based on a price-to-earnings ratio (PE) of just below 20 and a normalized earnings per share (EPS) number of $165.
Bonds. We expect interest rates to remain at historically low levels, but the direction may be higher over the rest of 2020. Our year-end base-case forecast for the 10-year U.S. Treasury yield is 1–1.5%, which would be the lowest level to end a year on record if realized.
Elections. Historically, when a president has been up for reelection, it has tended to boost stocks. History also shows that the US economy has major bearings on the presidential election outcomes. If there has been a recession during the year or two before the election, the incumbent president has tended to lose. In addition, how stocks perform the three months ahead of the election has delivered a solid track record of deciding who will be in the White House the next January.
COVID-19 news. Johns Hopkins reported 58,100 new cases in the United States on Monday, up 29.2% week over week on a 39% increase in testing, likely boosted by the July Fourth holiday. Hospitalizations are still tending higher in most states, but have clearly slowed in Arizona, California and Texas, where parts of the reopenings have been pulled back. CNBC reported vaccine production may begin by the end of the summer.
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