July 2020
Market Update

“Despite the gains seen in the second quarter, there remains a long road ahead for the U.S. economy.”  

What a difference a quarter can make. 

Markets enjoyed a historic rebound in the second quarter, thanks to an initial peak in coronavirus cases, continued government support and a quicker-than-anticipated economic recovery. Like markets, society also made a substantial rebound in the second quarter, as economies have at least partially reopened in all 50 states, people are starting to return to the office, families are taking summer vacations, and there’s even the hope for a return of sports and other cultural staples in the coming weeks and months. Indeed, we have come a long way from those panicked days of late March. 

But while we all welcome this progress, it would be a mistake to think uncertainty and market volatility are behind us. 

The outlook for the spread of the coronavirus is still very unclear, as new cases hit record highs in late June and four states – Arizona among those – have reinstituted various restrictions and lock-downs, sending freshly re-employed individuals back to the unemployment lines. This provided a somber signal that the virus will be with us, in one form or another, for some time to come. 

Additionally, the fate of the historic stimulus enacted back in March remains uncertain as of this writing. Paycheck Protection Program loans, which provided critical assistance to small businesses over the past three months were extended until August 8th by the Senate, just hours before expiring. It remains unclear what will become of the federal unemployment benefits included in the CARES Act, as they are set to expire at the end of July, although we expect there will be some continuation of that benefit, just not in its original form. There is also discussion about another round of stimulus checks; that federal stimulus played a critical role in the bigger-than-expected economic rebound witnessed in the second quarter, and without it, the economic outlook will become increasingly uncertain. 

Regarding the economy, while progress has been better-than-expected, it’s important to remember that the current level of economic activity remains far below the levels of a year ago. Despite the gains seen in the second quarter, there remains a long road ahead for the U.S. economy to return to pre-pandemic levels. 

The major U.S. stock indices all enjoyed a strong rebound and substantial gains in the second quarter, and just like in the first quarter, the tech-heavy Nasdaq notably outperformed the other three major indices. In the most recent quarter, that outperformance was due to large-cap tech companies being viewed as the longer-term beneficiaries from changing work and shopping trends in response to the pandemic, specifically “work from home,” cloud computing and online shopping. 

International markets also rallied in the second quarter as European and Asian economies re-opened, and those regions saw a consistent decline in new COVID 19 cases throughout the quarter. Emerging markets, whose economies are typically more sensitive to changes in expected global growth, modestly outperformed foreign developed markets and the S&P 500 thanks to a declining U.S. dollar paired with rising hope for a global economic rebound, following successful reopenings in Asia and parts of Europe. 

Looking forward, as we begin a new quarter and the second half of 2020, the macroeconomic outlook has improved substantially since March, and stocks have responded accordingly with a very strong rally off the March lows. But the last two weeks of June were a stern reminder that much uncertainty remains, and during the next several months we will learn whether the coronavirus outbreak will peak, and if the economic recovery we’ve seen since April can continue, and whether our government will move to continue benefits to the millions of unemployed workers. Those factors, along with the increasing influence of politics given the November election, will impact markets in the months ahead. 

In your portfolios here, we remain fully invested in both the bond and stock allocations, although having made some small adjustments in the various stock portfolios, strengthening our holdings in growth stocks or to tip-toe into some international stocks. Given the recovery in the markets to date, this is a great time to make any adjustments to your risk levels and we will be discussing this and more during our conversations with you this quarter. 

We continue to work remotely to do our part to minimize the spread of this virus and we appreciate your understanding as we work through the best ways to communicate with you in these challenging times. 

Enjoy your 4th of July festivities and stay safe. 

If you have questions, please contact us.

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