“Human beings can get used to anything, given plenty of time and no choice in the matter whatsoever.”
— Tom Holt, “Open Sesame,” 1998
Lately, Americans have taken small steps toward returning to their pre-pandemic lives. In my house, we’ve begun to relax a bit after nearly four months of hunkering down at home. While we still avoid restaurants and crowded places, we host small, socially distant visits with close friends in our backyard.
In short, we’re adjusting to changing circumstances, much like governments, businesses and other families have done throughout this crisis. Here in Dallas, one of our favorite restaurants revamped its menu to include take-out brunch kits — complete with pancake batter, maple syrup, bacon and eggs — when Texans were under stay-at-home orders. That’s just one example of the many ways businesses have pivoted over the last few months.
The recent emergence of new coronavirus hotspots, including some in the Dallas area, is a sign that this crisis isn’t over yet. But, if history is any guide, ingenuity in the public and private sectors will play a major role in limiting its damage. Signs of this are already emerging. As author Tom Holt points out (with tongue in cheek), given no choice in the matter, human beings tend to rise to the occasion.
Amid concerns about a new wave of coronavirus infections, U.S. equities experienced some steep declines in June, but still managed to rally for a third straight month. Thanks to these gains, the broad stock market, as measured by the S&P 500 index, was down only about 3% for the year and stood in positive territory for the trailing, 12-month period through last month.
In a sign of the greater appetite for risk, the Russell 2000 Index of U.S. small-company stocks, which tend to be sensitive to changes in domestic economic activity, outperformed the S&P 500 in June. Non-U.S. developed market equities and emerging-market stocks also bested the S&P 500. But they remained in negative territory for the year-to-date and trailing, 12-month periods through June, as did the Russell 2000 Index.
To many observers, the recovery of global equity markets over the last few months has been a head-scratcher, and it’s not hard to see why:
So, why did the U.S. stock market rally again in June, by which time it had recovered a good portion of the losses it suffered earlier in the year?
Until new coronavirus hotspots emerged, many investors were anticipating a slowdown in the spread of the virus based on signs that containment measures had largely worked. In May and early June, infection rates in a number of U.S. states, including some of the hardest hit, flattened or began trending downward, prompting authorities to begin loosening restrictions on movement and business activity. A number of European countries also took steps to reopen their economies.
Another driver of stock prices has been the U.S. government’s swift and aggressive efforts to soften the pandemic’s economic blow and keep the gears of financial markets running smoothly. (For more on the federal response, watch this short video.)
Lately, we’ve seen unemployment claims fall and retail sales and mortgage applications pick up, among other signs that the federal response and the lifting of containment measures are fueling a recovery. (More on this below.)
That said, downside risks loom over the second half of 2020 — including a possible delay in the passage of a widely anticipated fourth federal stimulus package, estimated at $1.5 trillion, and a potential larger second wave of coronavirus infections. A new wave of infections could lead to a pullback of reopenings, not to mention a pullback in consumer spending. In early July, a number of cities and states were already rethinking reopening plans in light of new coronavirus hotspots in the South and Southwest and rising infection rates in parts of the South and the West.
So why stay invested in equities? These days, I get asked that question a lot. In my view, the market was fairly valued as of late June based on a number of factors, including then-existing valuations of U.S. stocks relative to those in comparable periods of low and stable inflation rates. A number of technical indicators also bode well for staying invested. Watch this short video for more insight on the outlook for stocks.
Investor optimism fueled a rally in cyclical sectors, which tend to fare best when the economy is on the upswing. Technology, Consumer Discretionary, Materials, Industrials and Real Estate all had positive returns in June.
A major driver of market returns during the last bull market, Technology led the way, returning about 7% for the month. The sector gained 15% and more than 35% for the year-to-date and trailing, 12-month periods, respectively.
Few industries have been spared by the pandemic-induced downturn. But Technology has held up relatively well and, in some regards, even flourished as a result of recent changes in the way Americans live, work and play. Throughout this crisis, online shopping has surged, as has demand for things like videoconferencing and streaming services. (In my household, we’ve done our part by binge-watching a few series.) Technology has also benefitted from the fact that during highly uncertain times, the market tends to prize industries that have the potential to grow consistently regardless of economic conditions.
Energy, among the hardest-hit sectors this year, lost ground again last month. For the year-to-date and trailing, 12 months through June, the sector was down by about 35% and 36%, respectively.
Why has Energy fared so poorly? Earlier this year, historically low oil prices — coupled with falling demand for oil tied to the pandemic-induced slowdown — weighed heavily on the sector. After rebounding between late March and early June, the sector took another turn for the worse, even though oil prices had seemingly firmed up. The latest selloff appears tied to the resurgence of COVID-19 cases in some markets, which has some investors worried about the prospects for oil demand, as well as supply-related concerns, among other issues.
The broad bond market, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index, treaded water again in June. Over the last few months, the market has faced stronger headwinds than it did earlier in the year, when the U.S. economy took an initial hit from the pandemic and many investors rotated out of stocks and into Treasury bonds and other safe-haven assets. Longer-dated, 10- and 20-year Treasurys were the best-performing corner of the bond market for the year-to-date and trailing, 12 months through June, returning about 17% and some 19%, respectively.
For the month, investment-grade corporate bonds outperformed the broader bond market amid a greater appetite for risk. The corporate bond market, which seized up earlier this year, has also benefitted lately from Federal Reserve actions to keep credit flowing to companies. In mid-June, the central bank unveiled plans to begin buying individual corporate bonds. It has been purchasing corporate-bond exchange traded funds (ETFs) since May.
As in May, we saw signs last month that the U.S. economy has begun to recover from the initial impact of the pandemic.
Initial weekly jobless claims (the non-seasonally adjusted series), which peaked at over 6.2 million in late March, steadily declined through mid-June. Continuing claims also dropped as businesses began to rehire, according to an ISG report released in late last month. Although it remains high relative to historical levels, the U.S. unemployment rate fell to about 11% in June, from 14.7% in April, according to the Bureau of Labor Statistics.
Given the unusual nature of this crisis and the speed at which it has unfolded, it’s helpful to look at a wide variety of metrics — not just traditional indicators like unemployment and retail sales — to get a sense of where the economy is headed. In mid-June, we saw:
However, mid-June’s positive news quickly turned into a spike in new COVID cases later in the month, and subsequent backtracking on reopening measures in several states. This caused GIR to ratchet down their third quarter GDP growth estimates to 25% (down from 33%), while maintaining an 8.0% growth estimate for the fourth quarter. On a year-over-year basis, GIR expects GDP to decline by 4.6% in 2020, and grow by 5.8% in 2021, based on their most recent estimates from mid-July.
Since the start of this crisis, the Fed has kept a proverbial foot on the gas pedal. In addition to unveiling plans to buy corporate bonds, the central bank also said last month that it plans to keep interest rates near zero through 2022 and expand its massive balance sheet at the current pace for months. In doing so, the Fed leveraged one of its most-powerful tools — its words, as opposed to its deeds. In my view, the central bank’s power lies not just in its ability to adjust rates or take other specific actions, but also in its capacity to move markets by communicating its intentions.
Last month, Fed Chairman Jerome Powell not only outlined the central bank’s near-term plans but shined a light on recent improvements in the economy and the risks ahead. “We have entered an important new phase and have done so sooner than expected,” he said in testimony prepared for delivery before a congressional committee. “While this bounce back in economic activity is welcome, it also presents new challenges — notably, the need to keep the virus in check.”
When the history of this pandemic is written, the human and economic toll will surely take center stage. But there’s more to the story. This crisis has also unleashed a wave of creativity, from the global race to develop a vaccine to countless efforts by business large and small to adjust to our strange new normal.
By stepping away from business as usual, many people and companies have also started to reexamine their priorities. Recent dramatic protests for racial justice and economic equity have only added urgency to our collective soul searching.
At Goldman Sachs Personal Financial Management, we’ve long strived to make sure our clients’ portfolios reflect their values. So, if you’re rethinking your priorities lately, don't hesitate to reach out to your financial adviser to discuss. Maybe you’re a grandparent who’s ready for that lake house where you can spend more time with the grandkids. Maybe you want to begin contributing to a favorite cause. As we like to say, money is just fuel for living the life you want.
Invest well and stay healthy,
Kara Murphy, CFA
Chief Investment Officer
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S&P 500 Index: A broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a capitalization-weighted, unmanaged index that is calculated on a total return basis with dividends reinvested. The S&P 500 represents about 75% of the NYSE market capitalization.
Russell 2000 Index: This index measures the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks; the index serves as a benchmark for small-cap U.S. stocks.
MSCI Europe, Australasia, and Far East (EAFE) Index: This index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada.
MSCI Emerging Markets Index: This index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of June 2009, the MSCI Emerging Markets Index consisted of the following 22 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
Bloomberg Barclays U.S. Aggregate Bond Index: This is a market capitalization weighted bond index of investment-grade, USD-denominated fixed-income securities.
U.S. High Yield Corporate: The Bloomberg Barclays U.S. Corporate High Yield Bond Index measures the USD-denominated, high-yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded.
U.S. Investment Grade Corporate: The Bloomberg Barclays U.S. Corporate Bond Index measures the investment-grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by U.S. and non-U.S. industrial, utility, and financial issuers.
Bloomberg Barclays Municipal Bond Index: The Bloomberg Barclays U.S. Municipal Index covers the USD-denominated, long-term, tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.
S&P 500 GICS Sectors Level-1: In 1999, MSCI and S&P Global developed the Global Industry Classification Standard (GICS) to offer an efficient investment tool to capture the breadth, depth, and evolution of industry sectors. GICS is a four-tiered, hierarchical industry classification system. It consists of 11 sectors, 24 industry groups, 68 industries, and 157 sub-industries. Companies are classified quantitatively and qualitatively. Each company is assigned a single GICS classification at the sub-industry level according to its principal business activity. MSCI and S&P Global use revenues as a key factor in determining a firm’s principal business activity. Earnings and market perception, however, are also recognized as important and relevant information for classification purposes and are considered during the annual review process.
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