Second Quarter Market Review

The end of the second quarter was a welcome sight for investors following a dreadful first quarter, where markets declined swiftly and sharply.  Equity returns were almost a mirror image of the first quarter, as U.S. equities (S&P 500) soared over 20% (the index’s largest quarterly gain since 1998) earning back the 20% decline felt in the first quarter and a few percentage points away from its 2019 year-end value.  All sectors of the S&P 500 increased by double digits, except for utilities and consumer staples which increased 2% and 7% respectively. The Dow Jones increased roughly 18%, that index’s largest quarterly increase since 1987.  The price of West Texas Intermediate crude oil gained over 90% in what can only be described as an extremely volatile quarter, during which the price of oil turned negative.  Gold gained 13% as investors searched for a safe haven from increasing government debt and prospects for future inflation.

While markets rallied, many investors have struggled with the disconnect between an upward trending market and the economic reality of a global pandemic. There were several explanations for the positive returns this quarter, mainly the Federal Reserve’s aggressive monetary response, expanding their balance sheet by over $2 trillion in the quarter to reach $7 trillion.  The Fed’s actions and market commentary provided support to a bond market that was largely illiquid in late March, as the Fed stated their intent to support state and local governments, small businesses, and purchase the debt of specific high yield instruments. Chairman Powell went so far as to state the Fed is “not out of ammunition” and said, “there is no limit to what it can do”.  These comments put a floor under markets, providing a backstop to equities in late May while also coinciding with emergency government stimulus checks and enhanced unemployment benefits passed by Congress.

Additionally, optimism played a large part in the market recovery as late April data showed the coronavirus outbreak was leveling off with the infection curve bending in certain hot spots in the U.S.  By May, more than half the states had lifted some prior restrictions on business activity.  News headlines also drove markets, as any positive news on vaccine candidates provided relief that we are closer to the end than the beginning of the virus’ toll.  Talks of a “v-shaped recovery” were supported by surprising May non-farm payroll numbers, where 2.5 million individuals went back to work versus an expectation for a further decline of 8 million additional unemployed workers.  Retail sales and consumer sentiment increased as consumer spending picked up in May.

While hard to pinpoint all the reasons for a market move, a combination of government assistance, monetary support, and changing investor sentiment drove what some consider a FOMO (“Fear of Missing Out”) rally in markets.  Growth-oriented equities continued their out-performance relative to value-oriented stocks, as increasing retail investor exuberance was attributed to the run in technology stocks.  While not the sole contributor to the market narrative this quarter, high flying technology companies continued their impressive run, especially given close to 70% of S&P 500 constituents are still below their year-end 2019 value.  Through the first week of July, the markets have largely ignored negative headlines, including new coronavirus cases across the South and West, an unclear and possibly stretched earnings picture, inflamed US-China trade tensions, and an upcoming Presidential election.  We have no insight into whether these fears will factor into the market in the near-term or merely be background noise for a market supported by monetary and fiscal support. However, we feel much more confident that volatility will continue to be a part of investors’ lives and believe a globally-diversified portfolio is the prudent course of action to not only protect against any future market dislocations, but also position one’s portfolio to participate in any movement to the upside.

Although the first half of 2020 has been a roller coaster ride, we would like to thank our clients and friends for giving us their trust and support with their financial affairs, a responsibility we do not take lightly.  We value our relationships, especially as we navigate these uncertain times. We’re honored by your recommendations of Madison to your friends and family who could benefit from our holistic wealth management services.

Important Note: This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Madison Wealth Management does not provide tax, legal or accounting advice. © Madison Wealth Management 2020