A Big Bounce
For equity markets, the second quarter resembled a mirror image of the dismal first quarter. From late February to late March, U.S. stocks lost an unprecedented 35% of their value in just over a month. In the second quarter, however, U.S. stocks posted their best quarterly percentage performance in two decades as they bounced from the depths of the March 23rd lows. The tech-heavy NASDAQ market has led the way back up, and essentially sits at all time highs today. While technology rides high, it is a different story for many other sectors of the market. With technology stocks helping to support the S&P 500 Index while most other sectors were weighing it down, the benchmark index ended the first half of the year down 4% from January 1st. The Dow Jones Industrial Average was down 9.6% over the same time. The Value Line Arithmetic Index, which is more indicative of the performance of the average stock, was down 11.2% in the first half of the year.
Equities rebounded around the world as well with many stock markets clawing back large shares of their first quarter losses. Europe (Stoxx 600) is now down 13.3% year-to-date while China (Shanghai Composite), which entered both its lockdown and recovery phases earlier than the rest of the world, is only down 2.1% so far this year.
Too Much, Too Soon?
Many market observers believe that the recent strong performance of equities belies the actual state of the economy. Nearly 20 million jobs have been lost here in the U.S. since February and economic output took a nosedive as states went into lockdowns. In late April, oil prices (the front month futures contract) plummeted to briefly trade at minus $37 per barrel. Consumer spending dropped and the savings rate climbed as people stockpiled cash that would normally have been spent going out to eat or on travel.
Companies Holding Steady
With the broad shutdown of our economy, many investors expected a huge wave of corporate bankruptcies that would contribute to further job losses and more erosion of investor confidence. To a large extent, however, this wave has yet to materialize. While there have been a few high-profile bankruptcies, such as J.C. Penney, Hertz, Chesapeake Energy and Neiman Marcus, all were in very tenuous situations before the pandemic. The Federal Reserve’s aggressive corporate bond buying program enabled many companies, such as Boeing and Royal Caribbean Cruises, to tap the debt markets for large sums to build up their cash war chests for the economic challenges ahead.
Investors Looking Ahead
Investors are taking heart from the massive fiscal stimulus and unprecedented actions by the Federal Reserve to support the economy and the smooth functioning of markets. Corporate earnings, the sustenance of stock prices, will be very poor for the second quarter, which most of the country spent in lockdown. Out of the 500 companies in the S&P 500 Index, at least 180 have withdrawn their earning guidance for the balance of the year. Equity investors appear to be paying the current environment little mind and are instead looking forward to next year.
An Uneven Road Ahead
While the economic data are improving from the depths of recent months, Covid-19 remains a serious challenge. In many parts of the country (and in the country as a whole), positive daily cases are now spiking to new all-time highs. The increase in positive cases can at least partially be attributed to the increased level of testing, but no single statistic can really define the scope of the problem we face. The Centers for Disease Control (CDC) estimates that for every established positive case, there are ten cases that have gone undetected. According to this methodology, there are around 23 million Americans who carry, or have carried, the virus. Suffice it to say that we are still struggling mightily against the virus and probably will be until effective treatment options and/or vaccines are developed and distributed. Investors, in any case, are expecting an eventual return to normal life.
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