While our social lives proved uneventful in the second quarter of this crazy ride called 2020, drama was brewing between a quiet Main Street and a rallying Wall Street.  The economy took a mighty hit from Americans abruptly cutting back on discretionary spending, traveling, and commuting, resulting in a dire scenario for some industries and many small businesses.  Unemployment rose as business revenue deteriorated.  Oil prices collapsed into negative territory.  Homes became easier to finance, yet transactions declined.  Through it all the stock market recovered, seemingly unaware of the realities of quarantine life.  But the market’s oversight of a contracting economy means that our recovery has already begun, buoyed by optimism for effective COVID treatment and a potential vaccine as well as the Federal Reserve’s proactive moves aimed at establishing stability amid uncertain times.

 

Economic Conditions

 

U.S. – Rebounding Figures

GDP: As one would expect during a quarantine, the service sector contracted sharply in Q2, accompanied by manufacturing.  However, improving labor data, expanding manufacturing, and rebounding consumer activity are supporting expectations for acceleration out of the Q2 trough that was illustrated by -4.6% U.S. GDP growth so far in 2020.

Unemployment: The pandemic-triggered layoffs created eye-opening jobless rates, but many of the unemployed were on furlough with the potential to eventually return to their jobs.  This made for difficult reporting for the Bureau of Labor Statistics, so while April reported 2.5 million net new hires and a falling jobless rate, the BLS says unemployment likely topped 16% the same month.  The U-6 unemployment rate that includes part-time workers and discouraged job seekers reached over 21% in May. ²

Housing: The spike in joblessness mixed with stay-at-home orders thinned the number of potential home buyers, and the National Association of Realtors announced a 17.8% fall in residential resales in April, followed by another 9.7% decline in May.  However, rates dropped, and existing home inventory grew, paving the way for activity to pick up during the summer real estate season.  New home sales were down 5.2% in April but improved 16.6% in May. ^4,19

International – Unprecedented Times

The International Monetary Fund’s chief economist, Gita Gopinath, declared the coronavirus pandemic a crisis “unlike anything the world has seen before,” one that could send both developed and emerging economies simultaneously into recession for the first time since the 1930’s.  Yet the global economic recovery appears to have already begun, making this likely the deepest yet shortest recession in post-war history with global GDP falling -3.4% in 2020.  Per Gopinath, “pent-up consumer demand” for goods and services might hasten a global rebound¹¹, and the case for a sharp recovery has been strengthened by recent data surprises and policy decisions:

China’s closely watched manufacturing industry contracted slightly in April, but expanded again in May, at least by the measure of the Caixin/Markit Manufacturing Purchasing Managers Index. The private survey showed a factory PMI reading of 49.4 in April, then improvement to 50.7 a month later. China’s official factory PMI displayed a 50.8 mark for April, a 50.6 reading for May, and a 50.9 mark for June. ^4,12

The European Central Bank made a major move on June 4, nearly doubling the amount of its current monthly bond purchases to €1.35 trillion for at least the next 12 months. Seventy-six percent of European economists in a June Reuters poll believed the ECB would make further policy moves this year, and 56% felt that the bank would expand the scope of its bond-buying to an even greater degree. In addition, the European Commission proposed creating a €750 billion recovery fund to help eurozone nations ride through economic challenges. ¹³

 

 

EQUITIES: Tech Leads the Way

U.S. Equities: All three of the big Wall Street benchmarks recorded their best quarters of the century. The notable standout this year continues to be the NASDAQ composite index, as the drive for cloud computing and work from home solutions propelled tech stocks higher by 30%. The S&P gained 20.54% while the Dow Jones Industrial Average added 17.77%, although both remain in the red for the year. ^1,21

Developed International Equities: The MSCI EAFE Index (a benchmark for developed equity markets in Europe and the Asia-Pacific region) and the MSCI Emerging Markets Index posted double-digit gains in the quarter, though they were still down year-to-date as June ended. The EAFE rose 14.17% in three months.  Away from Europe, Japan’s Nikkei 225 increased 16.78%.

Emerging Markets:  Emerging market benchmarks gained 18.37% during the quarter as the number of new COVID-19 cases continued to taper off. China’s Shanghai Composite and Hong Kong’s Hang Seng both saw smaller gains: the former benchmark rose 8.64%; the latter, 5.40%.

 

 

FIXED INCOME: A Proactive Fed

U.S. Fixed Income: Amid all these developments, the Federal Reserve remained proactive. With short-term interest rates back near zero, the central bank used other tools to try to help the economy and send dovish signals to financial markets. In their June 10 policy statement, Fed officials pledged to increase their purchases of Treasury notes and mortgage-linked securities in the “coming months.” During each month of Q2, the Fed bought $80 billion of the former and $40 billion of the latter. After reaching record lows during the first quarter, the 10-year Treasury remained relatively unchanged during Q2. The U.S. Aggregate index added 3.03% during the quarter and is now up 6.30% so far in 2020.

Developed International Fixed Income: Global bonds rallied as yields generally fell. After a flat Q1, the BloomBerg International Bond Index added 2.31%.

 

Quarterly Focus: A Vast Disconnect

Looking at the monthly chart of the S&P 500 below, one could assume that everything is just about back to normal.  The sharp downturn that we saw in March has nearly been eclipsed, and the index now sits within striking distance of its pre-COVID high of around 3400.

Outside of the stock market, however, everything is far from normal.  While economic activity has bounced, it remains below pre-crisis levels.  Unemployment remains high, corporate profits are sure to be weak for the next few quarters, and social and political unrest seem to be at a tipping point.  This vast disconnect between stocks and just about everything else in our daily lives can be primarily attributed to  US and world government fiscal and monetary rescue policy.  The $2.6 trillion U.S. fiscal stimulus response has proven robust. These policies have curbed labor market damage with temporary layoffs accounting for more than 70% of unemployment claims. The individual payments from the CARES Act have more than offset private income losses whereby estimated 2020 disposable income growth is close to the 10-year average, up by 4%.  The impressive performance of U.S. stocks in recent months has largely been supported by this historic policy response. The U.S. has so far delivered coordinated fiscal and monetary support sufficient to offset the estimated initial shock from the pandemic and is spilling over to the overall economy. 

 

DPWM 2020 Outlook:  Taking Advantage of an Uncertain Market

As we face the back half of the year, can we safely assume that the worst of the recession is behind us?  No one has a solid answer.  A bounce back of Main Street as well as a continued stock market climb are both closely tied with COVID containment.  A rise in confirmed cases may slow the phases of reopening, in turn affecting earnings and economic indicators to which we are looking for improvement or at the least, stability.

So how do you navigate such economic uncertainty?  The most important action you can take today is to work with us to review and update your planning and financial strategy.  Maintaining a long-term perspective is helpful during these times of uncertainty; the chart below gives a longer-term view of three asset allocations and illustrates the power of diversification.  Although the end results are not meaningfully different, the volatility and amount of time it takes to recover from downturns can differ dramatically – and so too will the investor experience.  At DPWM, we build globally diversified portfolios that can be strategically rebalanced during times of volatility to take advantage of longer-term opportunities as well as offer tax benefits.

 

DPWM 2020 Outlook:  Taking Advantage of an Uncertain Market

As we face the back half of the year, can we safely assume that the worst of the recession is behind us?  No one has a solid answer.  A bounce back of Main Street as well as a continued stock market climb are both closely tied with COVID containment.  A rise in confirmed cases may slow the phases of reopening, in turn affecting earnings and economic indicators to which we are looking for improvement or at the least, stability.

So how do you navigate such economic uncertainty?  The most important action you can take today is to work with us to review and update your planning and financial strategy.  Maintaining a long-term perspective is helpful during these times of uncertainty; the chart below gives a longer-term view of three asset allocations and illustrates the power of diversification.  Although the end results are not meaningfully different, the volatility and amount of time it takes to recover from downturns can differ dramatically – and so too will the investor experience.  At DPWM, we build globally diversified portfolios that can be strategically rebalanced during times of volatility to take advantage of longer-term opportunities as well as offer tax benefits.

1 – CNBC.com, June 30, 2020
2 – CNBC.com, June 5, 2020
3 – CNET.com, June 18, 2020
4 – Investing.com, June 30, 2020
5 – Fred.StLouisFed.org, June 30, 2020
6 – Investing.com, June 30, 2020
7 – Briefing.com, June 26, 2020
8 – Institute for Supply Management, June 3, 2020
9 – Yahoo! Finance, June 10, 2020
10 – Marketplace, June 16, 2020
11 – CNBC.com, June 16, 2020
12 – CNBC.com, June 1, 2020
13 – Reuters.com, June 12, 2020
14 – MSCI.com, June 30, 2020
15 – Barchart.com, June 30, 2020
16 – Global Risk Insights, May 29, 2020
17 – Barchart.com, June 30, 2020
18 – FreddieMac.com, June 30, 2020
19 – TradingEconomics.com, June 30, 2020
20 – CNBC.com, June 17, 2020
21 – Wall Street Journal, June 30, 2020