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While in Q2 2020 the stock markets have managed to rebound considerably well after a major correction in Q1 2020, the Fed Chairman and Treasury Secretary warned that failing to control the rising COVID-19 cases can put major pressure on the U.S. economy.
On Tuesday, June 30, the U.S. stocks ended on a positive note after showing volatile swings early in the day, reportedly, Wall Street wrapped up Q2 2020 in its best quarterly performance over the last two decades. Despite the concerns of rising coronavirus cases, investor sentiment looked positive over the better-than-estimated economic data. After a 500 points rally on Monday, the Dow Jones (INDEXDJX: .DJI) surged another 200 points on Tuesday closing at 25,812.88 levels. The S&P 500 (INDEXSP: .INX) and the Nasdaq Composite (INDEXNASDAQ: .IXIC) gained 1.5% and 1.9% respectively.
With yesterday’s closing, the S&P 500 rally ended Q2 2020 with 20% gains backed by the biggest increase in consumer confidence after 2011. Similarly, the Nasdaq Composite registered a 31% surge in Q2, its biggest quarterly increase in two decades.
How Q2 2020 Became a Good Quarter for Stocks
After the economic reopening last month and lifting of the lockdown the markets started rejoicing in early June. The rise in the economic activity made investors hopeful over better industrial activity. However, the simultaneous jump in the COVID-19 cases in several states of the U.S. has yet again made investors jittery. The Fed, on the other hand, is taking measures to arrest the economic downturn caused by the pandemic. Tom Essaye, founder of The Sevens Report, told CNBC:
“A combination of 1) Stimulus, 2) Positive trends in the virus, 3) Economic reopenings and 4) Hopes for a vaccine drove stocks higher in Q2. As we begin Q3, only one of those tailwinds is currently in place: Stimulus. That doesn’t mean we’ll see a correction, but be suspect of market rallies until we can add more forces supporting stocks, because we’re one stimulus disappointment away from an ugly day.”
COVID-19 Cases Pose a Major Challenge to Economic Recovery
The continuously rising coronavirus cases have posed a major challenge to the equity markets and dampened investors’ optimism. The rising cases could possibly force the government on another lockdown. However, Treasury Secretary Steven Mnuchin has already said that the U.S. economy can’t afford another lockdown.
The infectious-disease expert Anthony Fauci recently said that if the behaviors don’t change, the cases in the U.S. could rise to 100,000 a day. Last Friday, the U.S. registered its largest single-day COVID-19 cases over 45,000. On Tuesday, Fed Chairman Jerome Powell also asserted that the control in the COVID-19 cases is key to the U.S. economy rebound. With some massive fiscal and monetary policy stimulus already in place, the continuing coronavirus cases can put pressure on the Fed for further aid.
Esty Dwek, head of global market strategy for Natixis Investment Managers, told Bloomberg:
“The downside has become more limited given how many investors missed the rebound, how many remain bearish and how much cash has been sitting on the sidelines. Coupled with abundant stimulus measures and liquidity, corrections are likely to be bought. That said, we remain prudent and believe it is too early to add a lot of risk to portfolios.”
On Tuesday, while testifying before the House Financial Services Committee, Powell said that uncertainty hover over the economic outlook on rising COVID-19 cases.
“Output and employment remain far below their pre-pandemic levels. The path forward for the economy is extraordinarily uncertain. It will depend in large part on our success in containing the virus,” Powell said. “A full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities.”
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