Markets staged an historic rebound in 2Q20 driven by an initial peak in the growth of COVID infections in April, economic reopenings across the U.S., hopes for a vaccine, and continued stimulus from global central banks.
The marcoeconomic outlook has improved a great deal since March, and stocks responded with a strong rally off March lows. Still, uncertainty remains, and the coming months will show whether the COVID outbreak will peak, and if the economic recovery can continue. Those factors, along with the increasing influence of politics given the November election, will affect markets in the months ahead.
2nd Quarter Market Performance Review
All major U.S. stock indices enjoyed a strong rebound and substantial gains in the second quarter, and just like the first quarter, the tech-heavy Nasdaq outperformed the other three major indices. Last quarter, that outperformance was due to large-cap tech companies being viewed as longer-term beneficiaries of changing trends in response to the pandemic, specifically “work from home,” cloud computing and online shopping.
3rd Quarter Market Outlook
Last quarter we talked about historic market volatility; this is still true three months later.
Markets enjoyed an historic rebound in the second quarter, thanks to an initial peak in COVID cases, government support and a quicker-than-anticipated economic recovery. Like the markets, society rebounded in the second quarter too, as economies at least partially reopened in all 50 states. People are starting to return to the office, families are taking vacations, and there’s even the hope for a return of sports and other cultural staples in the coming weeks and months. We’ve come a long way since the panic of late March.
But while we all welcome progress, it would be a mistake to think uncertainty and market volatility are behind us. The outlook for the spread of COVID-19 is still unclear, as new cases hit record highs, providing a somber signal that the virus will be with us, in some form or another, for some time.
Additionally, the future of the stimulus enacted back in March remains uncertain. Paycheck Protection Program loans, which provided critical assistance to small businesses, may no longer be available and unemployment benefits included in the CARES Act are set to expire July 31. Federal stimulus played a critical role in the bigger-than-expected economic rebound witnessed in the second quarter, and without it, the economic outlook becomes increasingly uncertain.
While economic progress has been better-than-expected, the current level of economic activity remains far below last year’s levels. Despite second quarter’s gains, the economy has a long road ahead to return to pre-COVID levels.
Politically, markets have so far ignored the presidential election, but that’s likely to change; it’s reasonable to think outlook for the election will begin to influence specific sectors and broad markets during the third quarter.
Finally, while essential to the economic recovery, the federal stimulus also exploded debt and caused deficits to surge, which is not ultimately sustainable. This is something we are mindful of as we craft long-term investment plans.
So, as we start the second half of the year, we’ve seen progress on economic and biological fronts, but uncertainty still remains. We can take comfort that there are still many tailwinds on these markets, including support and stimulus not only from the Federal Reserve, but every major global central bank. Global governments are stimulating their economies in ways unseen since the end of WWII, and the medical community is united in an effort to produce a vaccine.
We know past performance is not indicative of future results, but history shows a long-term approach, combined with well-designed and well-executed investment strategies can overcome periods of volatility, market corrections, and even bear markets.
Finally, thank you for your ongoing confidence and trust and please rest assured our entire team remains dedicated to helping you succeed in navigating this market environment.