Wall Street wrapped up the second quarter last week. It was one for the record books. The recovery from the “Coronavirus Contraction” has been substantial, but in many ways is still incomplete. April was a particularly strong month, and the entire quarter went down as one of the best in over 20 years. Lockdowns have eased as we unravel a period that some call “The Great Reopening”. Yet at the time of this writing, we’re seeing choppy markets due to the potential resurgence of Covid-19.

For now, let’s review what just took place in the past couple of months:

Index	2nd Quarter	1 YR
S&P 500 Large Cap Index	19.95%	5.39%
S&P Small Cap 600 Index	21.47%	-12.73%
S&P Developed BMI International Index	19.36%	-0.04%
S&P U.S. Aggregate Bond Index (total return)	2.93%	8.37%
S&P Municipal Bond Index (total return)	2.57%	4.23%
Dow Jones Equity All REIT Index	12.20%	-9.74%
Dow Jones Commodity Index (total return)	-8.69%	-19.05%

Source: Dow Jones, data as/of 6-30-2020 (doesn't include dividends unless noted). Here is comprehensive list of returns.

 

For equities, this will go down as one of the best quarters on record. Specifically, the broad-based S&P 500 surged more than 19% which was the best quarter since 1998. This follows a drop of approx 20% in the first quarter. The tale of two quarters was both remarkable and historically unprecedented.

As you can see from this visual of daily returns, volatility is back. At least compared to 2019, there has been a spike in trading days in which we’ve experienced +/- 2% returns:

In all, stock indexes – both U.S. and International – recovered in Q2 and saw positive gains. We observed the more volatile small-cap stocks outperform their large-cap counterparts for the first time in a while.  With the recent rebound, stocks still are trading below their early 2020 highs…yet, not far from one-year ago levels. 

What is noteworthy is the divergence of “growth” stocks versus “value” stocks (here is a good reference). Growth stocks (popular, flashy, more expensive stock names) have more than doubled Value stocks (less popular and more boring dividend-paying stocks) in the most recent three-month period. Over many years in the market, they’ve each ebbed and flowed with value stocks outperforming more times than not. Rarely have we seen such a wide discrepancy between the two like we have this year.

Entering 2020, battered energy stocks had been trading near 3-year lows. But they saw some much-needed relief in Q2, as oil prices rose. The technology sector remained strong with many work-from-home stocks contributing to the gains. Although positive for the quarter, the real estate and utility sectors were some of the relative laggards.

Investment-grade bonds (@ +8% YTD), along with gold (@ +17% YTD), have continued to serve as a backstop for diversified investors. Even the riskiest of bond sectors (U.S. high-yield) rallied sharply, fueled by the Federal Reserve’s efforts to purchase corporate bonds and high-yield exchange-traded funds.

Interest rates remained low with the 10-year bond yielding @ .65%, and there was even talk of potential negative interest rates. While I don’t suspect negative interest rates will happen, the current environment has resulted in extremely low mortgage rates and a strong uptick of people refinancing their loans.

The rebound in the markets makes less of a case for finding good “values”. Depending on who you talk to, stocks are currently overpriced…or they could also be undervalued. There is no shortage of opinions! What I do know is that investors who held through March, or added to their positions in March, have been rewarded at this mid-year vantage point.

In the past few months, we didn’t make any knee-jerk reactions but we did make strategic ones. We’ve executed tax-loss harvesting for clients in non-IRAs (i.e. sold and bought investments to capitalize on the tax gains/losses). We’ve also slightly over-weighted large-cap stocks while trimming exposure to small-cap stocks; and reduced our weighting towards real estate. Additionally, we’ve made some tactical moves including adding some more to gold, oil, and cash. All of these changes may be minor but hopefully will prove to be prudent given the current environment.

Looking ahead…there are a few main topics I think people will be focusing on. First, the U.S. Presidential election. At this point, experts are declaring it a close race. This will become a bigger focus for markets if the Democratic nominee (Joe Biden) takes a decisive lead over Donald Trump. It’s too early to tell at the moment.

Another major trend to observe is the job situation and corresponding unemployment rate. We’ve seen strong economic recovery in May and June with more people getting rehired and finding jobs. The unemployment rate dropped back to 11.1% (!) as 4.8 million jobs were added in June alone. We’ll need this to continue, as more people making money means more people spending money…and better for the economy.

Of course, we’ll continue to get a heavy dose of COVID-19 news, specifically as it pertains to the number of cases and deaths. The calculus of the reopening will be complicated and the markets will be fairly vulnerable to pulling back on negative news.

Many are hopeful we’ll have a vaccine by year-end, but until then the unknowns hang over us. History has shown us that the U.S. has gotten through terrible pandemics before and continued to prosper. I am confident that more people will fly again (they already started to) and sporting events and restaurants will open again. We’ll get back to normal – it will just take time.

Those expecting a “V-shaped” recovery for the economy may end up disappointed. Yes, we’ve seen the past couple months recover and appear to look like a V, but things may recover more slowly in the months ahead. We might not see 4% unemployment again for a couple of years, but we remain hopeful. Slowly but surely, progress will be made.

We’ll continue to see our share of negative news, and sometimes the news is conflicting. Yet through it all, I encourage us to keep our eyes on the road ahead. There will always be something to worry about, threatening to get us off track with our financial goals. Stay focused and stay disciplined. We’ll all emerge stronger once this storm has passed.

Brandon

 

Disclaimer: This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the advisor. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Dow Jones. Data is taken from sources generally believed to be reliable, but no guarantee is given to its accuracy.