The first quarter ended with pervasive fears about the long-term damage COVID-19 would do to our collective health and to our economy.  Stocks plummeted and government bonds soared as a result.  While markets have been very volatile since the beginning of this quarter on April 1st, investors have, for the most part, been buying steadily and have driven stock indexes up sharply in the last six weeks.  In broad terms, stocks have made up about half of what they lost in March, with all of the major stock indexes up double-digits from the recent market bottom on March 23^rd.  The S&P 500 Index is now down 11.4% year-to-date.

Diverging Trends in Stocks

There have been stark differences between the performance of different asset classes so far in 2020, and these differences tell a story about how investors think various industries or segments of the economy will fare in the post-pandemic world.  While the tech-heavy NASDAQ market is about flat year-to-date, the average U.S. stock, as measured by the S&P 500 Equal Weight Index, is down about 20% while the Russell 2000 Index of small-cap stocks is down 25%.  Real estate investment trusts have also suffered as investors weigh how much the new realities of WFH (work-from-home) and social distancing will impact the commercial property market.  

Investors are clearly betting, however, that as we struggle through the pandemic and its aftermath, our giant technology and e-commerce companies (for example, Apple, Alphabet (Google), Microsoft, Facebook and Amazon) are likely to continue to gain strength and traction and will exhibit more resiliency than the rest of corporate America.  These five companies now have the five largest weightings in the S&P 500 Index and together make up a remarkable 20% of the entire index.

Tough Choice

The virus leaves us a wrenching choice:  Do we remain in lockdown to minimize further spread of the disease until we have effective therapeutic options, or do we begin to reopen our economy knowing that with more activity, disease and deaths will very likely increase?  The best course lies somewhere in between the extremes, gradually reopening while doing so responsibly and keeping the most vulnerable segments of our population out of harm’s way as much as possible.

A Few Green Shoots

While the situation remains difficult, there are growing signs that our economy is beginning to come back to life.  Airline traffic is beginning to tick up, car sales are bouncing back and restaurants and retail businesses are preparing to gradually open back up.  More signs of economic life will likely emerge in the coming weeks, even as the reported economic numbers for May will be grim.

An Uncertain Path Forward

Through the rest of this quarter and the balance of the year, the path of the markets will likely depend heavily on the progress and effectiveness of our reopening.  Economic numbers for GDP, retail sales and unemployment could bottom in this quarter, and investors are hoping to see substantial improvement through the summer and into the fall.  Of course, there is no playbook for this scenario, and the rates of economic recovery are likely to vary significantly depending on the location and industry.  Nevertheless, as our economy begins to reopen in the coming weeks and starts to heal, the economic numbers will likely begin to turn in the right direction again and we can get on the road to recovery.

As always, I welcome your comments and feedback. Feel free to call or email us to discuss your portfolio or the markets.