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Without a stimulus package, 'we will see a down market': What experts predict in August

Federal stimulus packages have propped up the U.S. economy through the pandemic. Wall Street investors are watching congressional negotiations, and other key indicators, in August.

Twenty/20

The release of second-quarter GDP figures in late July confirmed what most investors suspected: Because of the coronavirus pandemic, the U.S. economy took its deepest dive since World War II. Fortunately, those numbers are backwards looking, and the market is already moving forward. The U.S. is not out of the woods yet, and volatility is ongoing, but there are signs that economic recovery could be on the way.

"It's natural for markets to ebb and flow over time for various reasons, but when it happens in a short time span, things can get rocky," says Daniel Milan, managing partner of Cornerstone Financial Services.

For instance, while stocks came roaring back in April and May, June brought some sluggishness and a more "sideways" performance with gains and losses generally staying in a set range, Milan says. That same bumpiness is likely to continue over the short term. But, experts believe, it will help if Congress approves a "robust" stimulus package in early August.

Here's a look at some of the events investors and analysts will be watching during the month of August.  

A strong federal stimulus package could boost markets

What's happening: Congress is working to come to an agreement on a fourth coronavirus stimulus package before its members leave for recess on August 10. Key components of the package could include a second stimulus check for households, an extension of extra unemployment benefits for out-of-work Americans, and tax breaks for businesses that are able to keep their workers employed.

Why it matters: Federal stimulus packages have propped up the U.S. economy throughout the pandemic. As the crisis continues, Americans, and investors, are looking for more relief to avoid economic disaster. "If Democrats and Republicans can't come together on a package before the August recess, we will see a down market," says Michael Sheldon, chief investment officer at RDM Financial Group.

What it means for you: A robust stimulus package could boost your personal income or make it easier to pay your employees. It could also prop up your investments. "Our recommendation is to stay invested but not to take big bets, given the significant uncertainty," says Jill Fopiano, CEO of O'Brien Wealth Partners.

VIDEO2:1802:18
What happens after enhanced unemployment benefits run out?

Video by Stephen Parkhurst

Will the election affect investments?

What's happening: The U.S. has a presidential election coming up in less than 100 days, "and Democrats and Republicans have very different views on how the economy should be run," says Sheldon. "Some investors are fearful of a Biden presidency because of the potential for rising taxes and increased regulation, but there's also been talk of the possibility of bringing more manufacturers from overseas and other things that could be good for business. It's just too soon to make predictions."

Why it matters: Election polling definitely contributes to uncertainty, "but it's hard to say whether it is definitively bad or good for markets," Fopiano says. 

When incumbent presidents lead in the polls, that, historically, has resulted in stock market run-ups, "but the health care and economic considerations of Covid-19 complicate this instance and perhaps overshadow it in the short run," Fopiano adds. "That said, increased signs of a Democratic sweep may be a drag on markets short term, but their overall policy platform probably isn't as negative as the market fears."

What it means for you: Be prepared for some additional ups and downs in the market as we move closer to the election. "As we get into the second half of August, September, and October, we could see some additional volatility in the market," Sheldon says.

Our recommendation is to stay invested but not to take big bets, given the significant uncertainty.
Jill Fopiano
CEO of O'Brien Wealth Partners

Improvement in sectors that 'lead markets out of recessions'

What's happening: While second-quarter earnings showed a drop in economic activity, spurred by the coronavirus-driven shutdowns across much of the country, many experts don't expect those lows to continue. Gene Goldman, chief investment officer at Cetera Investment Management, says second-quarter earnings will be the low point. "Earnings should be less impacted in the third quarter and fourth quarter, as the economy has already reopened," he says.

Why it matters: Analysts generally expect GDP and the market to keep trending up, partly because they're seeing increased performance in some of the undervalued sectors. Watch for upward movement in areas such as financials, industrial, health care, and homebuilding.

What it means for you: While the market has been led by technology stocks in recent years (and throughout the pandemic), "expect to see a sector rotation in areas including financials and industrials," Goldman says. "Historically speaking, they lead markets out of recessions. Financials should benefit from economic improvement, a potential steepening yield curve, significant loan loss provisions that may be too aggressive, and trading fees. Industrials should benefit from supply lines shifting and potential infrastructure spending."

Overall, many experts remain cautiously optimistic. As Fopiano puts it, "Longer term, there the outlook remains very attractive, which is another reason to stay invested." 

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