Quarterly Commentary – June 2020

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After the unprecedented drop in the first quarter, the U.S. equity market managed a significant rebound that continued until the first week of June. The market then reverted and declined for the remainder of June. The following are performance numbers from various popular indexes. Please remember index numbers are not individually comparable to a properly diversified portfolio. Each portfolio may include an allocation to securities similar-to these indexes in varying amounts based on your personal risk tolerance and should only be compared in that context. The S&P 500 was down 3.1% for 2020. The Dow Jones Industrial Average was down 8.4%. The Nasdaq Composite Index was up 12.7%. The Russell 2000 Index was down 13.0%. International equities as represented by the MSCI AC World Ex U.S. Index were down 11.0%. The MSCI Emerging Markets Index was down 9.7%. Fixed Income as represented by the Barclays Aggregate Bond Index ended up 6.1% for the year.

As we enter the second half of a remarkable year where we faced a deep economic contraction, record-high unemployment levels, and decreased consumer spending, the equity markets are demonstrating extraordinary resilience. One of the most asked questions regarding the stock market is about the apparent disconnect between its performance and the performance of the economy. It is important to realize that the stock market is not the economy. We measure the performance of the market using indexes that are constructed with a heavier emphasis on companies that have become a larger part of the economy. It just so happens that the heavier weighted companies in the indexes are technology companies that have done relatively well in the pandemic environment. There are still a lot of companies, large and small, that are struggling in this environment, but they make up a smaller portion of the index and therefore have a smaller impact on the index’s performance. Once must dig deeper to get a fuller picture. Smaller capitalization companies, for example, have not fared near as well as their larger counterparts. In the retail arena, there have been considerable disparity between staples and discretionary goods companies. As we manage through this crisis, there will be winners and losers, and some of the winners will win because they were the stronger players that pulled market shares away from the weaker players. In this environment, opportunities do present themselves and as new trends emerge, some are better positioned than others.

Overall, the depth of the economic plunge has been milder than anticipated. The subsequent rebound has been stronger than expected. GDP may have fallen only 30% to 35% instead of the 40% expected. The unprecedented amount of stimulus has certainly softened the impact, and more is expected over the next few months. This is also supportive of more risk-taking and money flowing to the equity markets. The “Don’t fight the Fed” adage about stock market performance during a very stimulative environment seems to be very applicable here.

The prospects of a second wave of the virus have started to dampen expectations. Investors were encouraged by the rebound in equities. A resurgence would create additional uncertainty. It should not however be a surprise at this point since more investors have started to build that as a strong possibility into their scenarios. With the possibility built into expectations, a second wave may not cause a significant pullback in equity markets. We should remember that the stock market has the most difficulty with the unknown. With more knowledge about what we are dealing with, relative to when this virus initially broke out, should help mitigate from a severe downturn. Furthermore, the news on vaccines and other related medication and treatments might overshadow some of the concerns as time goes by. The fear of missing out when a breakthrough on the virus front occurs will keep the market buoyed. By now we know that the toll may be medically severe on a certain segment of the population, however the economic impact will become more predictable. We also cannot underestimate the ingenuity that responds very quickly to this changing world. As an example, for those who can work remotely, it took months to adjust to that capability on a large scale instead of what might have taken years of planning under calmer circumstances. We have seen an unprecedented level of digital transformation occur in such a short amount of time to keep up with surging demand. There was no alternative and having to innovate during this time has been critical to serve customers. These investments have helped reshape the landscape and will pay significant dividends in the future. The term “Zoom meeting” has become part of the daily vocabulary.

We are very thankful to serve and guide you during these challenging times. Be safe and be well.