economic perspective

June 2020


By Stephen Rich

Mutual of America Capital Management LLC examines some key reasons behind the dramatic rebound in the financial markets and explores the issues affecting the economy in the United States and across the globe, including the ongoing impact of the COVID-19 pandemic.

The first five months of this year proved to be a period of unimaginable events and surprises. The Great Lockdown likely tipped the world into its deepest economic contraction since the Great Depression. The coronavirus has caused a devastating loss of life throughout the world, including the deaths of more than 110,000 Americans through June 9.* Tens of millions of jobs have been lost, and the stock market experienced its quickest decline on record. However, as astonishing as the global pandemic and its economic impact have been, the resilience of the American people and the rapid recovery of the financial markets are just as remarkable.

The stock markets bounce off lows

After the most dramatic and rapid sell-off in history, the stock markets bounced off their March lows to record their best April since 1987. In May, the S&P 500® Index rallied an additional 4.8%. Stocks rose on optimism about the prospects for economic recovery in the wake of the coronavirus pandemic. All 50 states have relaxed at least some of their restrictions as officials seek to revive economies battered by the pandemic, and investors are continuing to focus on any signs of hope for a vaccine.

Year to date, through May 29, large cap equities have emerged virtually unscathed, with the S&P 500 down 5.0%. The Nasdaq and Russell 1000® Growth Indexes are in positive territory at 6.3% and 5.2%, respectively. However, value and small cap stocks are down 15.7% and 16.0%, respectively. The gap between growth and value is staggering and stands at 20.9% between the Russell 1000 Growth Index and the Russell 1000® Value Index. We believe that if equity markets continue to respond to positive economic data, the gap between growth stocks and value stocks should diminish.

Past performance is not indicative of future returns.

Companies are issuing stocks and bonds at record pace

U.S. companies are capitalizing on a stock market rally fueled by the hope that the economy will continue to reopen sooner than anticipated. Year to date, the issuance of stock by public companies is at its highest since 2015. After raising $4.8 billion in March, U.S. public companies raised $22.3 billion in April and $65.3 billion in May. Furthermore, the rally in stocks reopened the initial public offering (IPO) market, which came to a dramatic halt in March.

Issuance of investment-grade corporate debt surpassed $1.0 trillion during May, which is the fastest pace on record. As context, over the full year of 2019, a total of $1.1 trillion in new debt was issued. The deluge of primary market supply has been facilitated by cheap financing costs as well as by the U.S. Federal Reserve (Fed) stepping in to support the credit markets with a $750 billion guaranteed backstop for corporate bond buyers. The Fed began purchasing individual corporate bonds in mid-June. Prior to this, the mere notion that the Fed would help corporate America by purchasing its bonds on the secondary market had reinvigorated bond investors who were concerned about corporate insolvencies and liquidity. Since the Fed's announcement to support U.S. corporations on March 23, demand for bonds has been enormous. Investment-grade bonds have rallied 13.9% through May 29, 2020, as measured by the Bloomberg Barclays U.S. Corporate Bond Index. Year to date, through May 29, the Index posted an aggregate total return of 2.54%.

Global stimulus has been massive

The efforts by the Fed and other central banks around the world to provide liquidity to their countries' economies through direct intervention in credit markets is unprecedented. To date, the U.S. Government has allocated $9.5 trillion in fiscal and monetary stimulus, accounting for approximately 44.4% of its Gross Domestic Product (GDP). Globally, $23.0 trillion of stimulus has been provided, including the commitment by the U.S., with much of the rest coming from the Eurozone and Japan.

The fiscal and monetary support are the driving forces allowing financial markets to stabilize and equity markets to experience a dramatic recovery. Still, there is talk in the U.S. that more fiscal stimulus may be necessary if the GDP does not restart as quickly as the stock market has rebounded. To that end, as the Fed previously stated, it is committed to doing whatever it takes to revive the economy.

High unemployment, but better than expected

The weekly initial jobless claims figure remains enormous, at about nine times the pre-pandemic average, but weeks of decreasing initial claims suggest that the worst of the coronavirus-related layoffs could be over. Initial jobless claims totaled 1.88 million in the week ended May 30. Over the past 11 weeks, a total of 42.5 million people applied for unemployment benefits. To put these figures in perspective, before this stretch, the previous high for weekly initial jobless claims was 695,000 in 1982. During the 2008–09 recession, weekly claims peaked at 665,000. Additionally, continuing claims, the total number of Americans claiming unemployment benefits, increased to 21.5 million in state programs for the week ending May 23.

America's labor market, measured by the nonfarm payroll report, unexpectedly rebounded in May by adding 2.5 million jobs. The bounce-back signals that the economy is picking up faster than anticipated in response to the damage caused by stay-at-home orders initiated by almost every state in March and April. The May numbers, coming after a 20.7 million decline during April, represented the largest monthly increase on record going back to 1939 according to the U.S. Department of Labor. Overall, the unemployment rate declined from 14.7% in April to 13.3% in May. This was unexpected, as most analysts were forecasting a loss of 7.5 million jobs and the unemployment rate to top 19.0%.

While the markets continued to rally on this fast turnaround in hiring, in particular among furloughed workers, some economists have questioned the reliability of these numbers as the unemployment status for many workers is changing rapidly. We think it would be prudent to observe more data points in the coming months before affirming a downward trend in unemployment rates. Moreover, an unemployment level of 13.3% is still extremely high and could take years to return to pre-pandemic levels—in fact, it is roughly double what the nation experienced during the entire financial crisis from 2007–2009.

Complicating the landscape even more is the increase in unemployment benefits of $600 a week that was approved by Congress with bipartisan support in late March and is due to end on July 31. Congress came up with the $600 figure because that amount, together with state benefits, added up to the average weekly wage; therefore, workers would earn their full paycheck while being temporarily laid off. However, job losses have been concentrated among workers that make below-average wages. As a result, about two-thirds of those eligible are collecting more in the enhanced benefits than they earned while working, according to a study by University of Chicago economists. This could be a disincentive for unemployed workers to return to work.

Presidential election and China

There are approximately 150 days until the U.S. presidential election as well as many other critical positions being voted on both at 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. Relations between the U.S. and China are likely to be a point of focus on foreign affairs. The rhetoric and tension between the two countries has escalated again, with many in Washington blaming China for not being transparent about COVID-19, including when it began and the scope of the outbreak, thus allegedly leading to the global pandemic. No candidate running for office in the U.S. wants to be viewed as "soft" on China. To make matters worse, China recently approved a national security law that bans secession, subversion, terrorism and foreign intervention and would allow its state security agencies to operate openly in Hong Kong. The financial markets will continue to react to the tension between the U.S. and China, especially because these two economies are the driving forces that will restart the global economy.


While some forecasters predict that the economic bottom in the U.S. is near, few expect the economy to snap back to the way it was before the pandemic. As a result of the mandatory closing of businesses and the various steps taken by the federal, state and local governments, these actions may lead to unintended consequences. While the financial markets have responded positively to fiscal and monetary stimulus, along with initial stages of reopening the economy and better unemployment levels, many risks remain in a post-pandemic era. These include the ongoing massive debt burden, the upcoming U.S. presidential election, structurally higher unemployment levels, more government intervention, heightened trade tensions between the U.S. and China, and new ways to conduct business. The possibility of a significant return of the virus looms as well. In short, the financial markets may have rebounded nicely so far, but there are many issues to resolve before the real economy gets back on track.

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

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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