As I sit down to write my second quarterly commentary, I hoped it would take on a different tone and focus on a topic different from the one published just three months ago. However, as you have likely guessed, this update once again focuses on the COVID-19 virus and its continuing effect on markets and the economy. We have all seen the numbers, but as of writing, there are over 13,000,000 verified cases worldwide and over 575,000 deaths attributed to the virus. In the United State alone, close to 3,500,000 people have tested positive with over 138,000 deaths. As our capacity to test has grown, so have the positive tests. There is so much coverage and reporting of the case numbers, positivity rates, and death counts, it can all be overwhelming. Personally, for the first time since all of this has started, I took last weekend off from reading and watching the news. I have to say it was quite rewarding. My guess is I was a better father and husband for it.
Contrasting the first quarter of 2020, which was the worst for the DOW (Dow Jones Industrial Average, an index comprised of 30 “blue chip” stocks) since 1930, the second quarter of 2020 was the best since 1987 as it ended with a gain of 17.8%. Other indices performed even better, with the S&P 500 rallying nearly 20% and the tech heavy NASDAQ soaring 29.4%. Small Cap and International Stocks recovered with returns in excess of 15% each. Although it is not the headline maker that the stock market is, the bond market calmed down and recovered in the second quarter as well. The Barclays Aggregate (a broad-based bond index) was up almost 6%. The questions on everyone’s mind: why did the market recover so quickly, and can this pace continue? The short answer is, the market is forward-looking, and stock prices were potentially undervalued based on what companies can expect to earn once the pandemic is behind us. The valuation issue, coupled with steps taken by the Federal Reserve, made investors feel comfortable enough to start buying (or at least quit selling) stocks. The Federal Reserve also stepped in and started buying corporate bonds directly, which helped stabilize the bond market.
Whether or not the investment recovery can continue depends on economic recovery. The stock market has (as of now) shown the possibility of a V shaped recovery; the economy has not. Month-over-month economic numbers have improved since April; however, they are not where they were pre-COVID-19. This is true of everything from unemployment numbers to retail sales to GDP (Gross Domestic Product, a measure of the goods and services produced by a country). The economy and the stock market do not (and rarely do) move in tandem with one another. The stock market (a leading indicator) can continue to rise and wait for the economy to catch up or it can pull back to a level that is more in line to where the economy stands. Only time will reveal the ultimate shape of the economic recovery.
A full economic recovery will be driven by the virus. Although it is early, we are seeing positive results for vaccines against COVID-19. Additionally, we seem to have a better “toolbox” to fight the virus than we did in March and April. As stated earlier, cases continue to rise but deaths do not seem to be rising as quickly. Medical progress should aid increasing confidence for people and companies to reengage in economic activity. One wrinkle to recovery will be the upcoming school year. Keeping children home may hinder the ability to get everyone back into the workforce. Families with two working spouses and children learning from home will face difficult decisions.
What does the future hold? As we enter the back part of summer and the prelude to fall, the only thing I can say with utmost certainty is market volatility will continue. Presidential election years are invariably volatile as the market seeks footing for the next regime in Washington. This year seems more contentious than others. We will see volatility when virus cases spike (and they will), we will see it when a vaccine has positive results from a stage three trial (and they will) and we will see it when President Trump or the former Vice President Biden say something controversial (and they will). With so many unknowns in the short term, it is important to continue to look toward the long term. For us at Persium, that means establishing and updating a financial plan identifying your short- and medium-term spending needs and coupling that with your risk tolerance to arrive at a diversified portfolio for your specific situation.
I closed my last commentary with a quote from Queen Elizabeth II. In stark contrast, I am going to close this one with a line written by Bill Nesh, guitarist for The String Cheese Incident. In the song “Good Times Around the Bend,” he writes; “Sometimes it seems like such a hard life / But there’s good times around the bend / Rollercoaster’s got to roll to the bottom / If you want to climb to the top again.” This is not a bad way to look at life – or at the markets. If you have never heard the song, I suggest you google it to put a possibly much-needed smile on your face.
The views and opinions expressed are of Persium Advisors, LLC. This commentary is provided for educational purposes only and should not be construed as investment advice. Persium Advisors is an investment advisor firm located in Atlanta, GA.
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