Near the beginning of the second quarter, the fastest bear market in U.S. history took place, as COVID-19 spread throughout the world. Global gross domestic product (GDP) readings dropped to shockingly low levels (-33.5% consensus estimate for Q2 per the Wall Street Journal’s survey of economists), stock markets started to rebound, and economies began to reopen. All of these events sent mixed signals to investors. Protests and riots took place amid the pandemic, further exasperating the sense of unrest. Seemingly lost in all of this is the fact that 2020 is a presidential election year.
Summary, Last Quarter: The U.S. economy entered the second quarter reeling from the fastest bear market in history, and over the next several months businesses and consumers shifted their focus to adapting to the COVID-19 restrictions. Schools and businesses were shut down, creating a difficult situation, particularly for working parents and their children. Unemployment hit record levels, and Congress launched the CARES Act, a $2 trillion relief package aimed at helping individuals, large corporations, small businesses, state and local governments, and public health services. The U.S. Federal Reserve launched a massive program to add liquidity to the financial system, reduced interest rates to essentially zero, and went so far as to back some corporate bonds. This coordinated effort provided strong support for the economy and the stock market, resulting in a significant rebound in equities. Meanwhile, social protests and riots forced many businesses to brace for or actually deal with additional costs from looting and destruction. As a culmination of all of these events, many businesses have been forced to close. From its high on February 19 to its low on March 23, the S&P 500 Index fell 33.5%. But from March 23 through June 30, the index of large-cap U.S. stocks rallied 35.2%. As a result, the index finished the quarter down 7.3% from its Feb. 19 high, and up 20.5% from March 1 to June 30. (Source: Morningstar)
Our Commentary: It was always our view that a peak in new COVID-19 cases would be key to enabling the market to normalize. Testing for the virus ramped up, and new cases peaked in April. (This peak has since been surpassed due to the recent surge in cases in the Sun Belt states and California.) The April peak signaled an inflexion point for the stock market. It helped local governments better understand the scope of the crisis and shape their reopening plans. Thus, in some areas of the country, the economy has started to reopen. Meanwhile, the stock market has rebounded because equity investors use forward-looking expectations for their investments, which is what makes the stock market a leading indicator of the economy. This dynamic—an economy starting to reopen and the major leading indicator rebounding—has provided some light at the end of the tunnel. The resurgence of new COVID-19 cases in many parts of the country, however, has added a new degree of uncertainty. Until this most recent surge is under control, the pandemic will continue to create market volatility.
Our approach during this time has been opportunistic, including adding high-quality stocks that were previously too expensive for our requirements. We believe there is always opportunity when looked at through the right lens. While the economy is beginning to reopen and monetary and fiscal policy remain in stimulus modes, we believe it will take a long time for the economy to fully heal. Unemployment will be a key data point to watch. The United States remains a long way from the Federal Reserve’s target unemployment rate of 4%, and the longer the economy is closed down, the more businesses will fail, presenting challenges to reaching that 4% target. This issue will undoubtedly be hugely important leading into the presidential election later this year.
Until next quarter,
Brian Dorn, AIF
Chief Investment Officer
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