2020 Q2 Quarterly Commentary
Thinking back to the first quarter of 2020 not only does it seem a lifetime ago but our world looked almost unrecognizable compared to today. In the first few weeks of Q2 we began to realize the extent that a once unknown virus in the countryside of China would have on the world at large. For most of April this new virus brought global supply chains to a standstill. It also mobilized the entire global medical community into developing a vaccine in a previously thought impossible timeframe. Even in our own day to day life like forgetting your mask when going into the grocery store, nothing has affected as many people in such a omnipresent way as this unrelenting invisible force. But this was only one of the shocks to our system that we would experience.
In spite of a pandemic, or maybe beseeched by it and its disproportionate effect on minority communities , our country has received a wake-up call on the state of the race inequality in this country. Since late May, there have been widespread and enduring protests throughout the country and in 50 other countries . Large publicly traded companies have changed not only policies but actual products due to their racist origins . Hundred year old statutes marking points of time once considered of significant importance in our country’s history have been torn down. Even in our own practice here at Custom Wealth Management, we have changed our policies to recognize Juneteenth as a day of observance. These are just a few of the ways our world has markedly changed at what feels like warp speed. So, we have to ask ourselves why wouldn’t the markets not follow suit?
From the neck twisting market decline to the head scratching rebound that started in late March and early April, it is all but impossible to believe that since the end of April, not much has actually changed. That is not to say that everything is normal. We’ve come to accept a new level of steady uncertainty. There are so many unknowns when it comes to the virus and the development of treatments and vaccines, its continued impact on US and Global economies, the lasting impact of the government’s economic response packages and subsequently how the financial markets will react to each of these uncertainties.
As of Friday, July 24th 127 stocks in the S&P 500 Index, or 40% of the benchmark’s earnings, had reported their second quarter’s earnings. Where previously beating earnings were rewarded and misses were punished, in this new pandemic market investors seem unphased either way. In some cases, companies who have reported good results have seen their stock prices decline, while others who have reported poor results have seen their stock prices climb higher. Some companies have given up altogether on providing guidance for what to expect next quarter. This has made fundamental analysis of individual stocks somewhat complicated, placing even more emphasis on macroeconomic analysis.
What is clearer than ever is how caught up in the moment many investors are when it comes to making their investment decisions. We have not seen the likes of this since the Tech Bubble of 1999-2000. Let’s spend a few minutes on the three major markets, starting with:
Following a disastrous first quarter, US stocks rebounded nicely in the second quarter with the S&P advancing 20% and the Russell 2500 mounting a 26% comeback. Despite this recovery, both indexes were still negative 3.1% and 11.1% YTD, respectively. Much of the bounce back can be attributed to the government interventions that occurred almost immediately. It seems as though the Federal Reserve and Congress had learned from the 2008 crisis to act quickly and robustly. Investors took their queues as the government was signaling they would not let stock prices remain at depressed values for very long.
Much like US stocks, International stock prices also participated in the reversal, also influenced by economic stimulus from foreign governments. Both the developing and e merging market indexes remained negative for the year, down 11.3% and 9.8% respectively, after increases of 14.9% in the MSCI EAFE Index and 18.1% in the MSCI EM Index for the quarter. The Fed’s action to cut the discount rate to zero coupled with the bond buying program along with investors flight to safety can take the credit for bond price appreciation.
But this story is not over. It is one we have seen numerous times. Precipitous market drawdowns are often followed by equally sharp recoveries. This is the nature of the law of averages. In the present case it’s very possible that investors may have been a little too eager in their wish for a return to normalcy.
Recent data indicates the recovery has stalled as fewer people are leaving their homes, commuting activity has leveled off, businesses are open fewer hours than they were last month, and new unemployment filings are on the rise aga in.
These factors would suggest the recovery has hit a sort of plateau, where as stocks are priced as if we are at a more optimistic point in the recovery.
And as cases of coronavirus continue to rise its hard to believe we will be able to bring the virus under control without additional lockdowns at some point. This will further exacerbate the gap between the economy and the market.
In this time of uncertainty it is hard to make sense of a world that no longer appears as it once did. But our purpose and commitment to our clients has not changed. We remain dedicated to our mission to remove the stress and guesswork from building and then following a sound financial plan.
To that end we have done the necessary task of laying the groundwork to manage our clients financial well-being through calm waters, personal challenges and even a global pandemic. We thank you for placing your trust in us and we strive every day to earn that trust. Please stay safe and we look forward to connecting with you soon.