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Markets will be ever vigilant to events in the U.S. and abroad to capture every move of economies recovering.

By Quincy Krosby, Chief Market Strategist, Prudential

May 01, 2020

Highlights

  • The path of the market followed massive and unprecedented measures by the Federal Reserve.
  • Results from testing and therapeutic treatment and vaccine trials will be essential to investors.
  • The market remains headline-driven as to news on the virus. 

The before-and-after world we’re in offered a semblance of normalcy as the S&P 500 rallied more than 30% since the pandemonium of indiscriminate selling that highlighted most of March. This stands in stark contrast to the general deterioration of the overall economy; the growing number of unemployed; the stalling of the housing market; the collapse of consumer optimism; and, in actions reminiscent of the 2008-2009 financial crisis, the closing of accounts and lowering of credit limits by credit card companies. The first quarter (Q1) earnings season similarly has the tinge of the before and after, as earnings decelerate and guidance is increasingly suspended, and as uncertainty permeates the outlook. Estimates for where the S&P finishes the year span a broad range, as analysts grapple with the duration and depth of the recession, and the type of recovery that follows.

The path of the market followed the massive and unprecedented measures implemented by the Federal Reserve, whose balance sheet has grown from approximately $4.29 trillion at the beginning of March to $6.7 trillion at the end of April. The Fed’s actions have stabilized both equity and credit markets. The $2.2 trillion Coronavirus Relief Bill passed by Congress, followed by another $484 billion package, have complemented the Fed’s efforts to help cushion the downturn until the economy fully emerges from the restrictions imposed by state and local governments.

At the April 29 meeting of the Federal Open Market Committee (FOMC), the Fed reiterated its commitment to doing what is necessary to “mitigate the damage to the economy.” And Chairman of the Federal Reserve Jerome Powell pledged that the FOMC will act “forcefully, proactively and aggressively as needed.” However, he warned that a recovery will be limited by a cautious consumer.

During May and June, there will be a series of announcements on progress in the development of therapeutic treatments and vaccines based on COVID-19 trials. The results from testing and these trials will be as essential for investors as is continued Federal Reserve and congressional support. The promise of effective and available therapeutic treatments will help underpin the market’s ability to broaden and enjoy “risk on” performance, serving as confirmation that Americans—as both consumers and employees—feel comfortable about the country’s attempt to open the economy. The market remains headline-driven as to news on the virus: its direction, new cases, therapies, vaccines and the push to get the economy back on board.

We need to keep in mind, however, that a market that has climbed so forcefully will need to consolidate, as overbought conditions demand new catalysts. Similarly, any event that causes tremors in the credit markets or damage in the ETF markets could jeopardize April’s “risk on” dramatic performance.

Read Quincy Krosby’s full May 2020 market commentary, “The Path to Recovery" PDF (827 KB).

The views and opinions are those of the author at the time of publication and are subject to change at any time due to market or economic conditions. This document has been prepared solely for informational purposes. This is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

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