The United States economy and stock market continued to further diverge in July. A reported 32.9% decrease in GDP for the second quarter of the year was the worst since the 2008 recession. On top of that, while the unemployment rate declined from its high of 14.7% in April, it still remained above 10%, while consumer confidence was lower on the month. Still, this didn’t stop equities from climbing higher, with the Nasdaq gaining 4.3%, the S&P higher by 4.2%, and the Dow Jones up by 2.3% in July. The market was led by the major tech giants of Facebook, Amazon, Apple, and Google, all of which reported better-than-expected earnings on the month.
China still remains a hot button issue, especially after relations between the eastern power and the United States hit a low point in July. Consulates in both countries were forced to close after back-and-forth accusations of espionage between the two nations. Additionally, the US government announced it was considering a ban on the Chinese-built social media app TikTok, which has over 500 million global users.
Corporate revenues have slowed in 2020, but there is reason to believe this slowdown will not affect the long-term outlook of the global economy. Projecting corporate cash flows out for the next 20-years shows that by 2022 corporate cash flow will recover, and the end result of the coronavirus will be less than a 10% impact on share value.
The US Government pumped trillions of dollars into the economy to support businesses and consumers amidst the coronavirus. As a result, gold prices continue to surge higher. The price of gold closed in on $2,000 per ounce by the end of the month and shows no signs of letting up. Investors are flocking to the precious metal as a way to hedge against potential inflation that could arise in the coming year. Investors also seem to be warming up to Bitcoin for the same reason. Fidelity released its “Bitcoin Investment Thesis” where it called Bitcoin an, “aspirational store-of-value”. Inflation fears and increased interest in store-of-value assets could lead to more interest in cryptocurrencies such as Bitcoin moving forward.
Elsewhere, in the developing world, the inability to pay off debts could lead to a global credit crunch. Heading into 2020, a significant amount of money was poured into developing countries by financial institutions. All told, the developing world has $11 trillion in outstanding debt, with $2.9 trillion in debt service due in the current year. Unfortunately, these nations are being severely impacted by the coronavirus, and as a result countries like Venezuela, Argentina, and Lebanon have already defaulted on some of their debt.
This inability to pay down debts will likely have a ripple effect on the global economy. This scenario has played out poorly in the past, as creditors ease back their lending as a whole creating a credit crunch as a result. Heading into the coming year it will likely be difficult for borrowers to obtain the financing and economic activity could grind to a halt. With creditors circling and legal actions closing in, many are calling for debt relief on sovereign debt payments to ease the burden on these countries who can barely keep their heads above water during the current pandemic and avoid an economic slowdown as a result.
The coronavirus still remains the ultimate wildcard in the global economy. However, as progress on a vaccine grows, so does optimism that the pandemic will be subdued in the coming seasons. The first Phase 3 clinical trial of a coronavirus vaccine will begin in the US, led by biotech company Moderna and the National Institute of Allergy and Infectious Diseases.
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