2020 | 2nd Quarter
After a first quarter that saw declines of over 30% from the stock market peak reached in February due to Coronavirus, the market rebounded strongly in the second quarter. The S&P returned 20% for the quarter and rebounded nearly 40% from the late March low. The market recovery was fueled by several factors. The Federal Reserve and the government enacted an unprecedented amount of monetary and fiscal stimulus to combat the economic effects of the Covid-19 pandemic. A variety of programs that provided loans, increased unemployment benefits, stimulus checks, securities purchases and other support programs totaling over $7 trillion were implemented to combat the business downturn and unemployment caused by the shutdowns of large parts of the economy.
Also, the market gained confidence that progress was being made on finding a vaccine or effective treatments for people infected with Covid-19. Several large drug companies have signaled that they are making progress on a vaccine and there has been much collaboration between companies, both large and small, in the healthcare field to expedite research in both treatments and a vaccine. While the time frame for this will probably stretch into next year at the earliest, it does give the market some confidence that some degree of “normal” business activity will return next year. Finally, many investors were willing to take a longer-term investment horizon than normal due to the minuscule return currently available in safe fixed income securities. Simply put, with ten-year treasuries yielding 0.6% to 0.7%, stocks with dividend yields of 2-3% and potential future growth looked more attractive even with the risk of heightened volatility.
All sectors of the market were up for the quarter but the sector that has been the primary driver for the market has been large cap Technology. In fact, along with certain consumer sectors (Amazon), technology is the only major sector of the market that has positive returns for the year so far. Returns have been increasingly concentrated in just a few very large companies (Apple, Amazon, Microsoft, Facebook, etc.) as investors looked for consistent predictable growth in an uncertain environment. While small cap and mid cap stocks had strong gains as well in the quarter, they remain down roughly 13% for the year due to the increased economic risk faced by smaller companies. International markets, both emerging and developed also rebounded but less than U.S. stocks.
Bonds also recovered from the losses sustained in the first quarter. While U.S. Treasury bonds posted gains in the first three months of 2020 as investors fled most every other fixed income asset, most other bonds declined as concerns about liquidity and credit risk swept the market. For the most part, bonds from municipals to high yield debt had strong recoveries in the second quarter as the Fed backstopped credit markets and ensured liquidity. Interest rates remain near historical lows and the Fed has signaled that it anticipates no increases in rates until 2022 at the earliest.
The economic outlook remains very uncertain at this point. The economy officially entered a recession in February and given the countrywide business closures and stay at home orders the second quarter economic statistics will be grim. With the gradual reopening of the economy over the past couple of months measures of economic activity have improved but with Covid-19 cases rising again it may be some time before we have any clarity on future expectations of growth. In fact, many companies have ceased giving any guidance as to what they expect their future revenues and earnings to be. As of now, the consensus seems to be that the economy will be fairly weak in the second and third quarters of this year, followed by stronger growth in the fourth quarter and into next year.
In short, this is one of the most uncertain periods we have seen in our years of market experience. Not only do we have the pandemic’s effect on the economy, but also civil unrest domestically and rising tensions with China on the international stage. With elections later this year, there is also the heightened possibility of a change in control of the Presidency, Congress, or both which could lead to major changes in tax, trade, and spending policies. Our strategy remains to be invested in companies with strong product offerings, leadership, and financial positions that will endure uncertain economic times and thrive when conditions stabilize and resume their natural trend upwards. This disciplined approach has served our clients well over the long-term and remains the cornerstone of our philosophy.
As always, please call with any questions.
Jonathan F. Kolle, CFA
President
Joseph K. Champness
Managing Director
Shawn R. Keane, CFP®
Vice-President
Rusty Giles
Director of Marketing
The foregoing content reflects the opinions of Smithbridge Asset Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
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