Quarterly Newsletter for the 2nd Quarter 2020
The year is off to quite a start! In six months, we have seen the stock market reach an all-time high, a crash and quick recovery. We have witnessed the Coronavirus pandemic, government mandated business closures, lay-offs, the highest unemployment since the Great Depression and explosive social/political environment.
Through all of this, as of June 30, on a price return basis, the Dow Jones Industrial Average (DJIA) was down 9.55%. The Standard and Poor 500 (S&P 500) was down 4.04%, while the tech heavy NASDAQ was actually up 12.11%. Overseas, the MSCI all Country World ex-US Index was down 11.00% and the MSCI Emerging Market Index had a loss of 9.78%. In the fixed income environment, the Barclays 1-3-year US Government/Credit Index showed gains of 2.88% for the first half of the year.
Fixed Income Market (Bonds): As you may recall from our last newsletter, the Fed lowered rates twice in March - moving the interest rate to zero. Additionally, they entered another round of Quantitative Easing, purchasing an enormous amount of Treasury Bonds and mortgage-backed securities. The “stimulus package” passed by Congress also gave the Fed the ability to supply the market with a tremendous amount of liquidity. Based on current economic conditions, we expect interest rates to remain level, and they will probably do so through 2022. Thus, we do not see much changing with the fixed income market. Of interest, is the fact that the Fed updated the Secondary Corporate Credit Facility to enable it to purchase individual corporate bonds. This will, in turn, support market liquidity and add credit for large employers.
US Equity Market (Stocks): Three elements are and will continue to affect the stock market through the end of the year: 1) the Coronavirus, 2) the Presidential and Senate elections, and 3) the Fed (the next “stimulus package”). First, the Coronavirus - the steps needed to control this hazardous virus (i.e.: business closings, shelter-in-place orders, etc.) have had a detrimental effect on our nation’s economy. This will, to a degree, continue to affect us and bring volatility to the stock market. Concerns about another shutdown and further economic restrictions have created some market anxiety. Second, the elections (important note: following are not political comments - they are simply economic comments) - the majority of investment professionals are concerned about the democrats winning the elections and taking control of the presidency and congress. The concern is that we will see higher taxes and increased regulations. As we have stated before, consumer spending makes up about 75% of our US economy. Should taxes go up, the consumer will have less to spend; thus, adversely affecting our economy. From a business standpoint, increased regulations and increased corporate taxes would hamper profits; thus, lead to reduced stock values. This is less than an ideal scenario as we try to recover from the downturns brought about by the Coronavirus. Finally, the Fed - the congress will be reconvening at the end of July and we firmly believe they will pass another stimulus package. This, in turn will give the Fed more funds to add more liquidity to the market. This is a real positive that will support the market and give investor’s confidence in the market.
Overseas Equity Market (Stocks): Most every country has been affected by the Coronavirus. Much like the United States, it has adversely impacted the health of their citizens and their economies. Certainly, the developed countries are better equipped to deal with the virus as they have access to better care and more providers. Emerging market countries, by contrast, are ill-equipped to deal with the outbreak from a healthcare perspective. Continuing trade tensions between the U.S. and China are likely to accelerate the regionalization of supply chains. The euro area economy contracted by almost 4% this year- the most on record. As the overseas economies face contraction and job losses, inflation is not an immediate issue. Monetary policies are continuing to remain accommodative. The ECB (European Central Bank) increased Pandemic Emergency Purchase Program by 600 billion euros. The People’s Bank of China is expected to cut the reserve requirements and lending rates. All of this is a positive.
Conclusion: Interest rates will remain extremely low for the foreseeable future- at least until we work through the Coronavirus situation and rebuild the economy. The stock market here and around the world is already showing signs of recovery as we move out of the shortest “recession” in our history. We believe the markets will show some volatility but, over the long-term, return positive results.
In closing, permit us to express our sincere appreciation for the opportunity to be of service to you. As always, should you have any questions or wish to discuss the above in more detail, please do not hesitate to contact us.