economic perspective

September 2020


By Stephen Rich

Mutual of America Capital Management LLC focuses on some major reasons behind the recovery of the financial markets and examines a number of issues continuing to affect the economy in the United States, including the ongoing impact of the COVID-19 pandemic.

A severe recession, massive unemployment, global pandemic and companies abandoning earnings guidance would not seem like the ideal setup for a major market rally. However, that is exactly what the stock market did in six months. The S&P 500® closed at a then-record high on February 19, 2020, and set a new record high on August 18, 2020. As a reminder, in 25 trading days from February 19 to March 23, the S&P 500 lost 1,148 points, or 33.8% of its value. Since that March low, the S&P 500 retraced all of those losses in 104 trading days. That means that since the close of the market on March 23, 2020, through August 31, 2020, the S&P 500 Index posted a 57.7% return. In general, investors have become more optimistic about an economic recovery, helped by massive government stimulus, vaccine prospects, positive economic data surprises and smaller than expected declines in U.S. corporate earnings.

Financial markets surge

Year to date, through August 31, 2020, large-cap equities have emerged virtually unscathed, with the S&P 500 up 9.7%. The Nasdaq and Russell 1000® Growth Indexes are solidly in positive territory, up 32.2% and 30.5%, respectively. However, the Russell 1000® Value Index and small-cap stocks are down 9.4% and 5.5%, respectively. The gap between growth and value is staggering and stands at 39.9% between the Russell 1000 Growth Index and the Russell 1000 Value Index, marking the highest annual spread between the two indexes since their creation in 1979. We believe that if equity markets continue to respond to positive economic data, the gap between growth stocks and value stocks should diminish.

The fixed-income market has also been strong, with interest rates at historic lows after falling more than 100 basis points since the beginning of the year. Demand for bonds has been strong since the U.S. Federal Reserve announced its support of U.S. corporations on March 23. Investment-grade bonds rallied 18.3% through August 31, as measured by the Bloomberg Barclays U.S. Corporate Bond Index. Year to date, through August 31, the Index posted an aggregate total return of 6.5%. Even more impressive, the 10-year Treasury bond and 30-year Treasury bond have returned 12.5% and 23.7%, respectively, on a year-to-date basis through August 31.

In addition, gold surged this year on rising demand and as investors bet that central banks and governments would continue massive stimulus measures to support economies hit by COVID-19. Gold bullion gained more than 30% this year through the end of August and hit an all-time high on August 7 at $2,064 per ounce. Investor interest in gold comes from a host of investment angles, including a weakening dollar from massive stimulus, the fear that inflation will rise and geopolitical uncertainty. Even influential investor Warren Buffett, who historically disliked gold as an investment, recently disclosed a purchase of almost 21 million shares in one of the world's most valuable gold mining firms.

Market success concentrated

Performance across economic sectors has been extremely narrow, with five technology companies—Facebook Inc., Inc., Apple Inc., Microsoft Corp. and Alphabet Inc. (Google's parent company)—accounting for over 97% of the S&P 500 Index's year-to-date return as of August 31. These five stocks now account for 23.9% of the weighting in the S&P 500 Index, up from 16.8% at the start of the year—an increase of 42%. These stocks have directly benefited during the COVID-19 pandemic because of their lack of exposure to the brick-and-mortar economy. Moreover, all received a tailwind from stay-at-home Americans, who replaced face-to-face contact with virtual communication methods.

Next steps for stimulus

Since March, the Fed has effectively implemented a multitude of monetary policy tools and successfully stabilized financial conditions. Fed officials continue to reiterate the need for additional fiscal support from Congress but acknowledge the danger of the massive amount of public debt that has accumulated over the years. Total public debt now stands at $26.6 trillion and has grown by more than $3 trillion this year. So far this year, Congress has passed four separate bills to address the damage caused by the pandemic, but the relief programs largely have run their course, and a fifth bill remains on pause while Congress is on summer recess.

In response to the inability of Congress to agree upon a fifth bill before the recess, on August 8, President Trump took the unusual step of providing additional economic relief to millions of individuals without the support of Congress. He signed one executive order and three memoranda with measures designed to:

    1) provide $300 a week in federal "lost wage assistance" to unemployment benefit recipients—down from the weekly $600 in the CARES Act that expired in late July—though states would have the option to contribute another $100;  

    2) defer payroll taxes for employees whose wages or compensation during any biweekly pay period from September 1 to the end of the year are less than $4,000;   

    3) defer payments and waive all interest on student loans until the end of the year; and

    4) have the Health and Human Services secretary and Centers for Disease Control and Prevention director consider whether an eviction ban is needed.  

These benefits would be disbursed from the $44 billion in disaster relief funds through the Federal Emergency Management Agency (FEMA). However, these orders likely will be challenged in court because each was done without congressional approval.

Excluding the president's recent executive actions, the fiscal policy responses total $3.6 trillion. Add the Fed monetary support of $6.2 trillion and the economic lifeline is nearly $10 trillion—a whopping 43% of U.S. gross domestic product. These actions dwarf the scale of the policy response to the global financial crisis of 2008, when fiscal stimulus amounted to $787 billion, and monetary stimulus amounted to $3.7 trillion.

Federal Reserve keeps rates in check

The Fed's most recent help to the financial system was announced at a symposium that is held each August in Jackson Hole, Wyoming. This year's symposium title was "Navigating the Decade Ahead: Implications for Monetary Policy." Federal Reserve Chair Jerome H. Powell announced a shift to "average inflation targeting," which means that the Fed will allow inflation to run above the stated goal of 2% to make up for periods when it was below the target. The practical implication of this shift is that the Fed is likely to keep short-term interest rates at or near zero for years to come. An accommodative Fed should bode well both for the bond and equity markets. Essentially, the Fed is continuing to convey that it is committed to doing everything necessary to help revive the economy.

Labor markets improve

The labor markets continue to show improvement, even though the absolute levels of both initial unemployment claims and total unemployment numbers are enormous relative to pre-COVID-19 levels. Since peaking at just under 6.9 million on March 28, the weekly initial jobless claims have continued to decline, with the most recent reading just above one million for the week ending August 22. However, over the last 23 weeks, 58.6 million people have applied for unemployment benefits, and only one weekly reading was below one million claims. Meanwhile, nonfarm payrolls continue to provide positive surprises, with nearly 1.5 million jobs added during July. Since May, 8.9 million new jobs were added back to the economy, accounting for almost 45% of the jobs lost during the pandemic. Overall, the unemployment rate continues to decline, from 14.7% in April to 13.3% in May, to 11.1% in June and 10.2% in July.1

Housing a bright spot

One of the brightest spots in the economy is housing, as three reports have highlighted positive news that the market is recovering. First, housing starts posted their largest monthly gain of the year, surging 22.6% in July to nearly 1.5 million units at an annual rate.2 Second, new building permits increased 18.8% to almost 1.5 million, a gain not seen since 1990.2 Finally, U.S. pending home sales rose for the third consecutive month in July, increasing 15.4% to their highest level since 2005.3 Historically low mortgage rates continue to help the housing market. Mortgage buyer Freddie Mac (Federal Home Loan Mortgage Corporation) reported on August 27 that the average rate on the 30-year home loan was 2.91%. By contrast, the rate averaged 3.58% a year ago. These reports offer potential good news for the U.S. economy, particularly employment, as a significant amount of labor and materials goes into housing construction.

Corporate earnings mixed on year

Another positive sign for the U.S. equity market was that second-quarter earnings exceeded expectations. However, it's important to point out that most companies had lowered the bar significantly, with earnings per share falling 33.2% on average. Furthermore, roughly 40% of companies in the S&P 500 suspended guidance during the pandemic. During the second-quarter earnings period, 75% of companies in the S&P 500 beat earnings, and 65% beat revenue estimates. While a typical earnings surprise from a company is one that beats revenue estimates by 4% to 6%, there have been some as high as 23%. Now that the second-quarter earnings reporting is nearly complete, investors are focusing on the second half of 2020. Earnings for both the third and fourth quarters are expected to be down 23% and 13.5%, respectively, but still better than the 33.2% decline in the second quarter.

Looming presidential election

The U.S. presidential election will be decided in a little more than two months, as well as many other critical races taking place at both the national and state levels. As of this writing, the key political topics expected to be debated include the state of the economy, unemployment levels, the government's handling of the pandemic and civil unrest. Both parties have held their respective conventions. As with many presidential races, this one is expected to come down to the wire; however, many believe it could lead to the most contentious result in decades, due to expected significant increases in mail-in balloting prompted by the pandemic. Future measurements of volatility, which indicate turbulence in the financial markets, have already risen above levels observed in the 2012 and 2016 elections. This turbulence is not being caused by the outcome of the election, but rather the potential for uncertainty surrounding the outcome, which may be delayed for days, weeks or even months.


The first eight months of 2020 led to various extremes as a result of the impact of COVID-19. From a historical perspective, the U.S. economy experienced the largest contraction ever in GDP, the most rapid fall in the stock market, the largest cuts to companies' earnings projections and the most unemployment filers in a month. The economy also experienced the largest fiscal and monetary stimulus in history, the largest snap-back in employment and a stock market rally that reached all-time records. Beyond COVID-19, the U.S. has witnessed civil unrest, increased tensions with China and a contentious presidential race that likely will grow even more divisive. Among the markets, valuations in equity markets, especially in the growth area, are trending toward record highs. The offset to these lofty valuations is that interest rates are at historic lows, and the Fed seems committed to keeping them pinned to zero for years to come. We believe Congress will approve a fifth stimulus bill to help individuals, many of whom are permanently displaced from their jobs. As a result of both fiscal and monetary support, we are optimistic that the economy will continue to show improvement in the coming months. As the economy heals and/or a vaccine is discovered, we would become more optimistic about U.S. stocks, especially value-oriented stocks that have lagged in the equity market's recovery this year.

Stephen Rich is the President and CEO of Mutual of America Capital Management LLC.


Bureau of Labor Statistics.


U.S. Census Bureau.


National Association of Realtors.

Past performance is no guarantee of future results. The index returns discussed above are for illustrative purposes only and do not represent the performance of any investment or group of investments. Indexes are unmanaged and not subject to fees or expenses. The index returns above reflect the reinvestment of distributions. It is not possible to invest directly in an index.

The views expressed in this article are subject to change at any time based on market and other conditions and should not be construed as a recommendation. This article contains forward-looking statements, which speak only as of the date they were made and involve risks and uncertainties that could cause actual results to differ materially from those expressed herein. Readers are cautioned not to rely on our forward-looking statements.

Mutual of America Capital Management LLC is an indirect, wholly owned subsidiary of Mutual of America Life Insurance Company. Securities offered by Mutual of America Securities LLC, Member FINRA/SIPC. Insurance products are issued by Mutual of America Life Insurance Company.

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