Greetings from your team here at Ridgeview Financial Planning. As I’m sure is the case for you, we’re adjusting to the recent re-shutdown of certain business categories including non-essential offices. Our building remains closed to the public, but we can still access it as needed. Fortunately much of what we do is already in the virtual world, so it’s been a relatively simple pivot for us these past several months. Now we just need to keep doing it a little longer.
As has been my routine in recent years, I’m taking the next few weeks off from writing my blog. I’m still working every day on your behalf, of course. I’m just harvesting extra time to spend with my family during what remains of summer.
I wish you all the best during these turbulent and anxious times. Little in our lives has been untouched by this crisis but I am optimistic about our future. (Repeat that last part like a mantra.) I hope you create opportunities to enjoy the beautiful summer weather.
The following few-minute read is from Liz Ann Sonders, Chief Investment Strategist at Schwab. It’s especially challenging these days to find voices of reason, and Liz Ann is one of them. In this article she reiterates how our economic recovery is likely to be lumpy and bumpy and protracted, what she refers to as “rolling W’s” instead of looking like a “V”. She explains that while some economic metrics showed a dramatic positive shift in June, which is great, they’re off historic lows and shouldn’t be expected to continue in the same way.
Have questions? Ask me. I can help.
In what has already been in many ways a historic year, it’s fitting that the second quarter (Q2) of 2020 would be a standout for stocks. The first quarter was one of the worst on record while the second ended as one of the best turnarounds in market history. This was a snapback from deeply oversold levels in March and, in hindsight, makes good sense. News related to the pandemic (which needs no explanation) was trending positive, economies here and abroad were reopening, and investors were pricing in a so-called “V-shaped” recovery.
Massive waves of selling shifted abruptly in late-March in the wake of historic Federal Reserve programs and fiscal stimulus from Congress. The rally was impressive, to say the least, but uneven and still not enough to bring the broad market positive for the year. Here’s a roundup of how major markets performed during Q2 and year-to-date, respectively:
- US Large Cap Stocks – up 20%, down 3%
- US Small Cap Stocks – up 26%, down 13%
- US Core Bonds – up 4%, up 6%
- Developed Foreign Markets – up 15%, down 11%
- Emerging Markets – up 18%, down 10%
Growth stocks continued to outperform during Q2, and a handful of large companies buoyed markets for much of the quarter. At the industry level, tech hardware stocks did best, up about 37%, as employers and consumers rushed to “go virtual”. Autos also saw a boost, up 36%, with consumers taking advantage of major discounting as dealerships reopened. Both industries are up around 20% this year. Retail stocks also did well, up about 31%, after getting trounced in the first quarter.
Bonds performed well during Q2 as investors sought shelter from stock market volatility. A persistent issue during much of our recent bull market has been the general malaise of retail investors regarding stocks. Investors have for years been reporting “bearishness” while moving money into bonds even as stocks continued higher. This trend continued during Q2 and helped bonds rise about 4% during the quarter and around 6% so far this year. Federal Reserve programs, alluded to above, helped support bonds as well.
The positive performance of some stocks contrasts with broad underperformance of the energy sector during Q2. In a dramatic but thankfully short-lived event, the price of oil went negative in April for the first time in modern history. The fear at the time was that a growing supply of oil coupled with a dramatic drop in demand due to shelter-in-place orders here and around the world would leave us with nowhere to store the commodity. This, among the general craziness of the moment, led oil traders to pay others (through negative prices) to buy their oil. Fortunately, global demand picked up, cooler heads prevailed, and oil prices got back to something like normal within a few weeks. The energy sector had been so volatile due to virus fears and pricing issues that, although the sector was up 32% during Q2, it’s still down 35% for the year.
Small company stocks also had a good run during Q2 but not enough to bring the category back to even. The issue with “small caps” is that these companies historically perform well over long periods of time but are more volatile in the short-term. They are also overwhelmingly domestic, lacking the global diversification of large multinationals. So, during a time of great fear for the health of our economy, small caps quickly took it in the teeth. After getting hammered in the first quarter the category charged back by 26% in Q2 but is still down 13% year-to-date.
Economic numbers showed signs of continued improvement during Q2 with unemployment levels declining to 11% at quarter’s end. This was down from 15% but sill about 8% higher than where we began the year. We created around 5 million jobs during June, but still just a dent in the well over 40 million jobs lost. Other measures of economic activity turned positive as well. Business sentiment is improving. The Institute for Supply Management reported its index reached over 52 in June after dropping to 43 in May (scores of 50+ indicate an expanding economy). Consumers are also spending again after a few months’ hiatus. But, like the stock market’s performance, this activity is uneven and highly susceptible to changes in the virus outlook.
While Q2 ended on a high note for stocks and there is reason for optimism, our troubles are far from over. As we entered July single-day infection rates hit records around the country and the nascent reopening is being put on hold in many areas. Unfortunately, the dark cloud of uncertainty still looms as we enter the third quarter. There is likely to be more market volatility, so best be prepared for it.
Have questions? Ask me. I can help.
Uncertain - An adjective describing something unable to be relied upon; not known or definite (thanks to Google for the definition and the physicist Werner Heisenberg for the title).
Lately I’m reminded a bit of the grind coming out of the Great Recession. By late-2009 and into 2010 stocks had been rising for some months even as many Americans were suffering terribly. Unemployment had hit 10%. Foreclosure rates were climbing steadily and would ultimately peak in 2010. Trillions of dollars had been lost from the nation’s housing market. It seemed like the situation was going from worse to horrible.
I used the word “uncertainty” a ton back then when talking with clients. I recall on more than a few occasions speaking to groups and getting pushback on how a vague term could possibly play such a large role in the stock and bond markets, and even our daily lives. Some couldn’t believe that human psychology impacts everything from the shopping habits of everyday consumers to investment decisions being made in Fortune 500 boardrooms.
But it’s true. When we feel certain we’re optimistic and can plan. We invest for the future and feel confident in our actions. Uncertainty, however, and rising amounts of it, undermines all aspects of our daily lives and economy. It makes us anxious and fretful. So, the word gets used a lot these days because maybe it best describes our current predicament. There are so many unknowns and much of what we’d ordinarily rely upon, no matter how mundane, seems to be in flux.
Even though I feel like I’m squinting to see the light at the end of the tunnel, hope springs eternal. During the darkest days of ’09 and ‘10 that I mentioned above, tiny so-called “green shoots” were popping up everywhere within the economy. There was still lots of pain, of course, but ironically the recession had already technically ended (in June 2009, as a matter of fact – it’s always defined afterward) and the economy would soon come roaring back.
Here are two quick pieces from JPMorgan regarding recent market volatility and the health of the banking system. Both address questions being bandied about in the media and some of you, so I wanted to share these perspectives.
Please click below to continue reading…