2nd Qtr Portfolio & Market Observations 2020

When the second quarter began, the stock market was just beginning to recover from one of the worst and quickest declines in history. By the end of June, U.S. stocks registered healthy gains, closing out a more upbeat quarter that saw strong advances across all equity markets. The S&P 500 Index posted its best quarter since 1998 with a 20.54% positive move, offsetting most of the pandemic-related drop from February’s highs to March’s lows.

The technology-heavy Nasdaq Composite Index posted a remarkable 30.94% gain and finished the first six months of a turbulent 2020 with a 12.74% advance. Mid- and small-capitalization stocks, as measured by the S&P 400 and S&P 600 Indexes, posted gains in the low to mid 20%, but ended the first half of the year in negative territory.

Market optimism regarding an economic recovery helped boost the consumer discretionary sector to its best quarterly gain on record. The technology sector also saw steady advances, cementing its leadership for the year. Energy was among the leading sectors, helped by a solid rebound in oil prices. More defensive sectors such as utilities and consumer staples lagged yet all eleven sectors of our domestic economy were in positive territory for the quarter.

Equity markets outside of the U.S. enjoyed a strong rebound during the quarter as well, although they did trail the U.S. market. The MSCI EAFE Index, which measures the performance of the developed markets, gained 15.15% for the last three months.

The U.S. Treasury yield curve was virtually unchanged during the second quarter after a dramatic drop in the first three months of the year. The Federal Open Market Committee met twice during the quarter, as scheduled, with no change to their overnight rate, which they expect to keep at near zero until at least 2022.

About 20% of the country’s labor force were unemployed by the end of April. On June 8th, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) found that monthly economic activity peaked in February 2020. On a quarterly basis, the peak happened in the last quarter of 2019. While not officially declared yet (the NBER committee identifies recessions and expansions in hindsight), there is no denying that the corona recession is now underway. U.S. Gross Domestic Product (GDP), the broadest measure of economic health, fell at an annual rate of 5% in the first quarter of 2020, the biggest quarterly decline since an 8.4% fall in the fourth quarter of 2008 during the depths of the financial crisis.

As the number of new Covid-19 cases slowed, states began to reopen. Our economy added 4.8 million jobs in the month of June, and over the past two months manufacturing, has recovered over 600,000 of its lost jobs. Durable goods orders rose in May, and new home sales grew. Consumer spending, which sank sharply in March and April, rebounded in May, fastest for those at the bottom of the income scale, where government programs and “recovery rebate” checks have played a more significant role. TSA counted more passengers going through airports’ security checkpoints in June, and gasoline usage rose almost 40% after being at record lows back in April.

However, the initial rebound may leave the U.S. far from where we started the year. There is still a lot of uncertainty about the virus and the future availability of an effective vaccine and treatment. Social distancing is having a major impact on several sectors of the economy – travel, hospitality, retail, entertainment, and healthcare to name a few. Some of those industries lost half their jobs between February and April and those lost wages contributed to a reduction in consumer spending. This effect may be relatively limited, thanks in part to the government aid that played a key role in countering the economic effect of the pandemic, but those who expect a sharp, complete V-shaped recovery in the next few months may end up disappointed. Even if this shows to be the shortest recession in history, a full recovery is some ways off.

What is important to remember is this volatile shake-up to our economy and everyday lives is 100% Covid-19 induced, and that, whether by vaccination or extinction, it will end. Once there is science to ensure our safety, the normal rhythm of life will return and the U.S. economy will most assuredly emerge even stronger.

Dumont & Blake Investment Advisors, LLC
June 30, 2020