The Dog Days of Summer

July 23, 2020

In ancient times, the “dog days” coincided with the heliacal (at sunrise) rising of Sirius (the dog star), and were believed to be times of drought, bad luck, and unrest, when people and dogs alike were driven mad by the extreme heat. Nowadays, the “dog days of summer,” typically refers to the period of particularly hot and humid weather experienced in the Northern Hemisphere during July and August.

Will the V-Shaped Market Recovery Last?

Here in Chicago, it clearly feels like the dog days of summer are upon us. But what of the stock market, which has been hotter than the summer sun since bottoming out on March 23. During the past four months, global equities rose over 40%, marking a near V-shape recovery for stocks. However, with the economy still struggling and Covid-19 cases spiking across the southern and western U.S., the question weighing on investors’ minds is whether the market can maintain its torrid pace, or will it experience its own dog days ahead?

On the surface, the remarkable market rebound seemed puzzling given the grim news about the pandemic. Yet, the market is forward-looking and was clearly pricing in much better days ahead for the economy. And, as things reopened across the U.S. and around the world, that optimism didn’t seem so farfetched. The May and June jobs reports showed a 2.7 million and 4.8 million payroll gain. And, while that only represented about a third of the jobs lost during the pandemic, it was promising news.

Unemployment Challenges Lie Ahead

The challenge though lies ahead. The Paycheck Protection Plan (PPP), which provided over $500 billion in forgivable loans to small businesses, originally required those loans to be spent on payrolls within 8 weeks of receipt. And even though that time period was subsequently extended, it appears most of the loan money was spent in May and June. This could mean that some businesses may now be forced to lay off employees, causing jobless claims to rise and the July job report (released in early August) to show some degree of backpedaling.

Furthermore, the extended unemployment benefits provided by the CARES Act are due to run out shortly, absent further legislation. Congress returns from a short break this week but will go into a month-long recess beginning August 10. This does not allow much time to pass further stimulus. And, with the looming election and ideological differences between the parties, negotiations this time around could prove even more fractious than before.

There Are Positive Signs

Further stimulus could be the jolt the economy needs as the spike in Covid-19 cases has caused several states to pause or backtrack their re-openings. However, it’s not all bad news. Earnings releases have been positive for certain sectors. And there have been gradual increases in the number of people flying, staying in hotels, and eating out at restaurants. Furthermore, there are over 170 different coronavirus vaccines being developed with 17 in clinical trials.

Markets can adjust quickly. We saw that during the sell-off in March and the equally dramatic rebound that followed. It’s best to not attempt to time the market or outsmart it. Focus on the long-term, stay disciplined, and rebalance when appropriate. Like the summer heat, dog days for the market are inevitable, but don’t let them drive you or your portfolio mad.