After the harrowing market declines of the first quarter, stock markets around the world managed a resounding, unprecedented comeback amid low points in global economic health, millions of people out of work, and emerging bankruptcies. The stock market rally was driven largely by hopeful signs that the U.S. will succeed “bending the curve” lower and slowing the rate of new infections, combined with fresh optimism from the largest fiscal and monetary stimulus packages in American history.
By the end of the second quarter, U.S. shares had recovered to a loss of just -3.2% on the year by posting the highest S&P 500 quarterly gain since 1998. Developed international stocks weren’t far behind, gaining more than 15% and China had a new high in June. Commodities also gained and oil prices stabilized, but gold was the clear winner with a gain of 14%. Bonds managed to deliver modest gains, while Treasury bonds remained flat.
With new stimulus packages creating an explosion in monetary liquidity, the money supply increased during the quarter while the willingness to spend it collapsed. When money is not being spent, it must be saved. Savings rates skyrocketed from 12% to 34% of disposable income with many of the recipients of these programs putting new cash into the recovering stock market.
Meanwhile, there is still tremendous uncertainty about future earnings because many corporations have suspended guidance on future results. So far, markets seem to have given a pass to the devastating macro and corporate results, instead looking far ahead into a future recovery to justify current valuations which have swung from deeply undervalued in March to now trading at the highest valuations since the dot-com mania of 1999.
Moreover, the Federal Reserve maintained its omnipotent stance throughout the second quarter with Chairman Powell providing assurances that they would not ‘even think about’ raising interest rates for the foreseeable future. He also said, “We're not out of ammunition by a long shot. No, there's really no limit to what we can do with these lending programs that we have. So there's a lot more we can do to support the economy, and we're committed to doing everything we can as long as we need to.”
As the quarter drew to a close, investors began gauging the likelihood of a potential second wave that would force additional lock downs and shelter-in-place orders and could lead to a double-dip recession. New infections stopped falling and began surging in some parts of the country. Yet markets shook the noise and continued to grind higher, adding a sense of wonder as if investors failed to appreciate this economic downturn was the most severe contraction since the Great Depression.
In the short term, it is difficult to predict what lies ahead. There’s no denying that at least for the second quarter, the underlying trend in economic data saw improvement, albeit from very depressed levels. In the longer term, the pandemic will eventually end, but the implications might carry forward for decades to come. As always, we choose to remain optimistic for the future. These are trying times but we all persevere by taking steps to stay healthy and positive.
In the meantime, we will continue to be there for you, building plans and diversifying portfolios in an effort to help you achieve your goals regardless of challenging conditions. If you have questions about our investment strategy, or would like to discuss your financial plans or the opportunities that the current market may present for your specific situation, please contact our office at (800) 542-4916. We wish you a happy, healthy and safe summer.
Eric W. Kendrick, CFP