The first half of 2020 was a wild ride for investors.
What was barely a news story in the beginning of the year erupted into a global catastrophe as the coronavirus pandemic rocked investors around the world. Amazingly, the U.S. stock market isn't much changed from where it started the year. The S&P 500 finished the first half of 2020 down just 4%, with the broad market index gaining a record 20% in the second quarter.
Venturing a guess as to what will happen in the second half of the year may be a fool's errand in the current climate of uncertainty, but that's never stopped prognosticators before. Keep reading to see eight predictions for what could play out in the stock market and the greater economy in the remainder of 2020.
1. The Nasdaq will beat the Dow
Perhaps the best indicator of the separation occurring in the economy is that the tech-heavy Nasdaq has crushed the Dow Jones Industrial Average, which is composed of more traditional blue-chip stocks. Through the first half of the year, the Nasdaq Composite gained 12.1%, while the Dow lost 9.6%.
That pattern looks set to continue in the second half of the year as the conditions that favor tech stocks -- a pandemic pushing people to work from home, shop online, and avoid social gatherings as well as spending on things like restaurants and travel -- haven't changed. Meanwhile, a number of Dow stocks are particularly vulnerable to the pandemic, such as McDonald's, Nike, Disney, and Boeing, and their results are likely to be ugly in the second half of the year, weighing on the blue-chip index. Energy components like ExxonMobil and Chevron also look weak with oil prices still low, and financials like JPMorganChase and Goldman Sachs could sink as the Federal Reserve recently warned that the 34 biggest banks could suffer as much as $700 billion in losses under a worst-case scenario.
2. There won't be another national lockdown
COVID-19 cases are spiking across much of the country, but another national lockdown like the one the U.S. experienced in March and April seems unlikely. What makes more sense at this point is encouraging mask-wearing and social distancing and implementing incremental restrictions where necessary, which we're seeing in states like Texas, Florida, and Arizona, where bars have been closed again. Other states have also pulled back on allowing indoor dining. At this point, it's clear that crowded indoor spaces where people can't wear masks, like bars, are the most dangerous kinds of places to gather and therefore the riskiest businesses to reopen. It may also be difficult to reopen other high-traffic indoor businesses like restaurants, malls, movie theaters, and gyms, but restrictions on other sectors like non-essential retail, construction, and manufacturing that were in effect during the lockdowns now seem unnecessary.
The difficulty of reopening restaurants, bars, and mall-based establishments means that those businesses are likely to suffer, and competing options like food delivery apps, e-commerce, and video streaming could benefit.
3. Congress will pass another rescue package
The CARES Act, which sent individuals $1,200 stimulus checks, handed out extra benefits to the unemployed, and saved small businesses through the Paycheck Protection Program. It staved off the worst-case scenario from the pandemic and has helped grease the economic recovery.
However, a number of those benefits, including enhanced unemployment checks, are set to expire soon. At the same time, there are signs that the economic recovery is grinding to a halt. Despite a strong June jobs report, initial unemployment claims have barely improved in recent weeks, and are still about twice as high as the pre-pandemic record. Meanwhile, continuing claims are hovering at around 20 million, showing high levels of churn in the job market but not enough Americans coming back to work to bring the trend line down. Other indicators have also shown economic activity like highway traffic and discretionary spending beginning to flatten in mid-June after a robust recovery.
A stalling economic recovery and flaring pandemic will put pressure on Congress to pass a bill to prevent widespread bankruptcies and evictions, as those would only exacerbate the health and economic crises the country is facing. Meanwhile, in an election year, President Trump and Republicans in Congress will be especially motivated to act, and the Federal Reserve has encouraged more fiscal stimulus. The HEROES Act, which would provide a second stimulus check, passed the House in May, but stalled in the Senate. Still, that bill or something like it could gain renewed momentum as the recovery slows and cases spike. If Congress passes a bill, it will likely come during the next session, which starts on July 20.
4. Buffett will still be a loser
Warren Buffett's reputation as an oracle of investing has taken quite a beating this year. Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) stock fell 21.2% through the first half of the year, compared to just a 4% drop in the S&P 500. Buffett's avoidance of tech stocks and his preference for more economically sensitive businesses like financials and industrials, both as subsidiaries and stocks, have put him at a disadvantage during the crisis. Meanwhile, aggressive actions by the Federal Reserve to buy junk bonds and lend to struggling corporations have undercut Berkshire's own ability to play white knight and capture some favorable deals as it did during the financial crisis.
Buffett is sitting on a cash hoard of nearly $140 billion, which many expect him to deploy, but it's clear he views the market as too pricey at this point. Until valuations are more to his liking, he's unlikely to make a big move, and may instead prefer to buy back Berkshire stock with the conglomerate now trailing the market.
5. Microsoft will be the only big tech company to grow profits this year
There's no question that the five biggest tech companies -- Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), and Microsoft (NASDAQ:MSFT) -- have carried the stock market this year. The group makes up about a quarter of the S&P 500's market cap, and all five posted gains for the first half of 2020.
Considering their massive cash balances and competitive advantages, they're among the most resilient companies during the current crisis, but still, only Microsoft seems poised to grow net income this year.
Google and Facebook are both facing a severe softening in the ad market, which is exacerbated by the recent ad boycott, and eMarketer even said that U.S. ad sales at Google would decline for the year. Amazon said it expected breakeven profits for the current quarter as it spends $4 billion on COVID-related expenses to keep customers and employees safe, which includes developing its own test. Finally, Apple has been forced to close dozens of stores across the U.S. due to the increase in coronavirus cases, and the company is highly dependent on consumer spending, which will take a hit with the global economy sinking into a recession.
With its focus on the enterprise market, Microsoft is the best-positioned to grow during the pandemic, as enterprise tech spending has been mostly insulated from the economic effects of the crisis thus far.
6. Amazon will make coronavirus tests available to the public
The coronavirus pandemic has tested Amazon like almost nothing before, as the company had to suddenly ramp up operations to meet an unexpected surge in demand. The virus has also posed safety challenges for a company that relies on hundreds of thousands of warehouse workers, which is why Amazon announced in April that it was undertaking an experiment to build its own testing capacity. The company has opened its own lab where it's developing tests to use on its employees, and CEO Jeff Bezos identified a lack of testing capacity as one of the key challenges to a global economic recovery in his April letter to shareholders.
Amazon has not provided an update on the testing project since April and has declared no intentions to offer tests to non-employees, but the company has a history of developing new projects in-house, like Amazon Web Services and logistics, before deploying them to the general public. If the company can reach the scale necessary to make enough tests, offering them to the public would be a logical next step. Amazon already has a burgeoning healthcare business and a clear appetite for the industry based on the launch of pilot program Amazon Care, its acquisition of online pharmacy Pillpack, and its Haven joint venture with JPMorgan Chase and Berkshire Hathaway.
If the company can reach the scale necessary to test non-employees, doing so would help burnish its reputation as an innovation powerhouse and establish it as a force in healthcare, serving as a launchpad to a growing business in that industry. Additionally, it would engender goodwill among the general public at a time when antitrust regulators have been eyeing it closely.
7. Zuckerberg will cave to the pressure
The Facebook ad boycott has suddenly become the biggest party in corporate America. Dozens of advertising heavyweights have joined the #StopHateforProfit boycott, including Unilever, Ford, Clorox, Honda, Coca-Cola, Pepsico, Verizon, and Starbucks, pledging to pull their marketing budget from Facebook for at least the month of July.
The backlash against the social media giant accelerated rapidly in the wake of the George Floyd protests and as accusations have grown that the company helps amplify hate speech, threats of violence, and political disinformation on topics like voting rights. Zuckerberg's reluctance to change Facebook's policies has also led to employee protests, including some resignations.
Facebook shares fell 8% on June 26 as the boycott accelerated. The extent of the economic effect on the company is unclear, but the damage to the company's and Zuckerberg's reputations, as well as the effect on employee morale and recruiting, is the bigger issue here. After all, it's understandable why companies like Verizon don't want their ads appearing next to posts from Holocaust deniers. So far, Facebook has taken some minor steps to address the concerns, but not enough to satisfy its critics. With the election heating up, the issue is likely to attract more attention, and Facebook does not to want be seen as spoiling another election. It's in the company's best interest to change its policies.
8. Marijuana legalization will get a big push
In the midst of a global pandemic and economic crisis, the issue of marijuana legalization has largely been forgotten, but it could see renewed attention in the second half of the year. With an election on tap, the issue could galvanize voters, and a Biden victory could help usher in new reforms at the federal level.
Marijuana legalization is also unique in that it's at the intersection of a number of the crises buffeting the country today. Racial injustice has come into the spotlight following the death of George Floyd, and critics often cite unequal enforcement of drug laws as one example of systemic racism and a cause of high incarceration rates. Calls for marijuana decriminalization could grow louder as a result.
Meanwhile, the country is in the midst of a jobs crisis, and state and local tax coffers are as depleted as they've been since at least the financial crisis due to a lack of consumer spending and mass layoffs. Legalizing marijuana could be a new source of employment and a way to raise much-needed funds for local communities. As both a social justice issue and an economic issue, marijuana legalization seems poised to take a step forward in the fall.
One thing is clear
After a wild first half of the year, the second half of 2020 could be just as full of surprises. The presidential election looms and the pandemic presents unique challenges to voting, adding to the potential for a disputed election. Meanwhile, investors will be paying close attention to progress toward a vaccine, the spread of the coronavirus, and the broader economic recovery, all things that could stoke further volatility.
One thing is certain. Expect the unexpected.