Stock markets around the world rallied in the second quarter of 2020, recouping much of the ground lost in the first quarter of the year as the Coronavirus pandemic shook the overall economy and dominated headlines.
The tech dominated Nasdaq Composite Index returned to all-time high territory in June while the S&P 500 and Dow 30 ended the quarter 7% and 11% off previous highs respectively. The strong stock market amidst all the uncertainty in the economy has been a head-scratcher for many.
Below we’ll look at the performance of different sectors, several asset classes, some leading and lagging economic indicators, and some of the government policy that has been implemented – all of which may help to shed some light on these confusing times.
The stock market has mostly reinforced a few of the guiding principals we should all remember: markets are not predictable in the short term, stock prices are driven purely by supply and demand, and while markets are influenced by the broader economy they are not directly linked.
When we looked at asset class performance in the first quarter of 2020, exposure to treasuries and other bonds was a big focus. Fixed income was protecting downside and providing returns with negative correlation to stock market results, reducing overall portfolio risk. In the second quarter higher risk assets made a comeback and bonds lagged.
Commodities and real estate gained back some of the ground lost in the first quarter but still have largely negative returns year-to-date. Value stocks continued to underperform those in growth indices while small caps edged out larger companies. The volatile markets of 2020 seem to be benefitting the assets on the far ends of the risk spectrum more so than those considered moderate. With more volatility likely due to uncertain macro events, remaining diversified looks to be a wise decision.
2020 has proven to be a year of extremely volatile employment data. We’ve seen swings of unprecedented values as record numbers of workers applied for unemployment insurance and subsequently returned back to work at some capacity.
The U-6 data on this chart includes “under-employed” persons as well as unemployed indicating that a large number of people are working but earning less than they would at full employment. While initial claims are much lower than they were a few months ago, we’ve still seen 17 straight weeks with more than 1 million people filing for benefits. With the extended unemployment benefit scheduled to cease soon, it will be a number we’re keeping an eye on each week.
Most leading indicators moved in a positive direction based on the data released in the last 3 months. Manufacturing saw an impressively big uptick after a few months of slumping activity. Housing data showed some modest declines, but mostly due to upward revisions on past data. Retail sales and consumer sentiment both moved in the right direction, but the latter is still significantly lower than highs from pre-recession times.
A closer look at retail sales data indicates that spending patterns are returning to normal. At the height of the COVID recession we saw spending on food and groceries jump while all other types of spending declined sharply. These trends seem to be trending back to usual levels now in both regards.
It’s been a time of record stimulus and spending as the US Government has been looking for ways to minimize the impact of coronavirus shutdowns on businesses and the American people. We’ve yet to see the data released on the total US public debt but expectations are that it will grow by a whopping 19% over the next 12 months. Treasury outlays have also been significantly higher than ever before, dwarfing anything from the 2008 financial crisis recession.
Here we have a chart showing stock market values and GDP over the current recession so far as well as the past two recessions (in grey). The magnitudes of movements in both this time around are apparent from looking at this chart. The “V” shaped recovery that seems to be taking place in the stock market is yet to be seen from a GDP perspective.
In summary the stock market has mostly reinforced a few of the guiding principals we should all remember: markets and the economy are not predictable in the short term, and having a well thought out financial plan is critical to your long-term financial health.
Paul R. Rossi, CFA