Highlights
• Equity markets rebounded last week, but another rise in weekly initial jobless claims suggests the economy may be slowing.
• Continued accommodative fiscal and monetary policies will be key to sustaining the economic recovery until a medical breakthrough occurs.
• The U.S. dollar weakened further, while gold prices continued to rally and reached an all-time high.

Equities ended higher, with the S&P 500 Index up 1.7%.¹ The U.S. dollar was down for the sixth straight week, hitting its lowest level since May 2018.¹ Gold was up 4.7%, marking its eighth consecutive week of gains and setting a new all-time high.¹ Technology stocks led due to strong earnings. REITs and consumer discretionary stocks were strong, while the energy, materials and financial sectors were down. Second quarter earnings showed a record-setting drop, but another rise in weekly initial jobless claims suggests the economy may be slowing. Little progress was made in Washington over a coronavirus stimulus package, raising investor angst.​

Weekly Top Themes
1. Second quarter real GDP contracted at an annualized rate of 32.9%, marking the steepest decline in history.¹ Following that substantial weakening, third quarter GDP is likely to post the largest sequential increase on record, possibly 15 to 20%.

2. Second quarter earnings will likely decline 35%, despite 80% of the reporting S&P 500 companies beating lowered expectations (nearly 75% of companies have reported). Apple, Amazon, Google and Facebook reported earnings on Thursday. Despite it being the worst quarter of the pandemic, together those companies grew their revenues and earnings per share 18% and 27%, respectively, according to Goldman Sachs.

3. The Federal Open Market Committee reiterated its extensive support for the economy by leaving rates near zero and extending all stimulus packages. Fed chair Powell reiterated that he’s “Not even thinking about thinking about raising rates.”

4. The economy has recovered some of its losses, but it remains far from full employment, and deflationary pressures dominate. The recovery is fragile, and the recent upsurge in coronavirus infections is curtailing real-time indicators of economic activity. The U.S. economy clearly lost momentum in July, which should put policymakers in Washington on alert as the new stimulus bill continues to move through the legislative process.

5. Testing of new Covid-19 vaccines is moving at unprecedented speed by academic and biotech firms, with partnerships becoming the norm.

6. The spread of the coronavirus is moderating economic growth nationwide. Some of the worst affected states are seeing declines in the number of cases per day, but the volume remains high. As a result, states are leaving reopening plans on hold or further tightening restrictions. Upcoming PMI and ISM data are critical to assess the evolution of the recovery.

7. The rally in gold prices has been supercharged by U.S. dollar weakness, along with central banks’ accommodative monetary policy. The recent surge reflects a potential Fed shift toward an inflationary bias against the backdrop of rising geopolitical tensions; elevated U.S. domestic, political and social uncertainty; and a growing second wave of coronavirus.

Economic Recovery Will Be Bumpy, But It Should Persist
Just when global equity prices might stumble, positive news seems to boost sentiment further. This good fortune will not last indefinitely, but we are not approaching a peak and risk-off phase. Policymakers are focused on supporting economic activity until a sustained recovery is underway. Short-term setbacks are still possible, but a material decline seems unlikely.

Still absent is a medical policy to control the virus, or allow a return to relatively normal economic and social activity. While we have seen some positive steps, a solution is not imminent. The longer it takes to develop a vaccine or successful therapies, the greater the risk to investor belief in a sustained economic outcome. Maintaining a strong reflationary bridge via other policy options is critical until a successful health outcome emerges, otherwise business failures and unemployment might intensify.

A cautious short-term strategy is warranted, given the huge equity-market rebound since March 23, unattractive valuations and signs of a resurge in infections. The declining U.S. dollar and the potential end to a longer period of U.S. equity market outperformance is a relatively new development. This is likely to be over multiple years, rather than ending than abruptly.

Last week’s second consecutive uptick in a new unemployment claims could be a precursor to a poor payroll report on August 7. It is unclear if unemployment will stay permanently high due to an inability to maintain normal levels of economic activity.

We remain cautious in the near term. School reopenings, a secondary wave of infections and a contentious U.S. election could unnerve investors. The cyclical economic recovery will be bumpier than many hoped, but it should persist as long as the monetary and fiscal reflationary bridge holds.

Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen.

¹ Source: Bloomberg, Morningstar and FactSet