As we entered the second quarter of 2020, the world and investment markets faced serious challenges. In just weeks, the COVID-19 issue had morphed from an obscure threat in rural China into a global pandemic. As infection rates soared, countries entered lockdowns and economies teetered. Unemployment rates quickly soared as businesses were forced to close. As U.S. stocks fell about 35% in less than six weeks and the longest economic expansion in history came to an end, many believed this was the end of investment gains for a long time to come.
Of course, we all empathize with the pain of lost lives and challenges this event has caused. As financial professionals, we maintain a sense of purpose and perspective even in the face of these unprecedented events. This is nothing new. Maintaining a sense of purpose is part of our culture and embedded in the DNA of our country.
An example is a letter President Abraham Lincoln sent to Congress in 1862, during one of the most tumultuous times in our nation’s history. Lincoln wrote, “The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty and we must rise with the occasion. As our case is new, so we must think anew and act anew.”
During the current crisis, that is what the American people and people of the world did. They rose to the occasion. Within weeks of the unfolding crisis, governments, rightfully recognizing the breadth of the challenges before us, passed massive stimulus packages. Researchers at universities and companies joined the fight, using advances in genetics and artificial intelligence to develop tests for the virus that just weeks before was largely unknown. Recently, both potential treatments as well as possible vaccines have been developed and have shown promise in trials. If these don’t work, there are more behind them.
Advancements in technology made it possible for many, including our practice, to move to working from home efficiently and seamlessly. Perhaps even 10 years ago, none of this would have been possible. It wasn’t just high tech. Grandmothers produced masks in sewing rooms and auto companies pivoted to producing ventilators. That is the power of thinking anew.
Given the collective power of these efforts, investment markets staged a powerful recovery. The Dow Jones Industrial Average and the S&P 500 turned in their best quarterly performance in decades. Even though both indices remain down somewhat for the calendar year, these are the best quarterly performances since 1987 and 1998 respectively.
Domestic Equity: As noted, U.S. stocks advanced strongly in the second quarter. The S&P 500 jumped to a 20.5% gain as government stimulus and medical advances buoyed markets. Smaller stocks, as represented by the Russell 2500, soared over 26%. For the calendar year, the S&P 500 and the Russell 2500 were still down 3.1% and 11.1% respectively. While still down, it is a far cry from the worst-case scenario many expected just three months ago.
International Equity: Foreign stocks also participated in the quarter’s recovery, though somewhat more muted than U.S. returns. Developed foreign markets, represented by the MSCI EAFE Index, increased 14.9% for the quarter. Emerging market equities advanced 18.1%. Even with the strong second quarter returns, international markets are also still down for the calendar year. Developed and emerging market indices are down 11.3% and 9.8% respectively.
Fixed Income: As the spread of the virus continued to severely depress economic activity, the government took decisive action. Late in the first quarter, the Fed cut the discount rate to zero. This was followed by a variety of programs to inject liquidity into the fixed income markets. This, together with increased buying from investors fleeing the equity markets, drove yields lower and boosted bond returns. The Barclays Aggregate, a measure of the total bond market, rose 2.9% for the quarter and is up 6.1% for the calendar year. High-yield bonds turned in strong results for the quarter despite the current challenges. The index jumped 10.8% for the quarter but given the weak results from the first quarter, remains down 3.8% for the year.
Of course, a dramatic rebound from the lows of the first quarter doesn’t mean this is all over. It is not. There will almost certainly be setbacks and disappointments along with progress in the fight against the virus and the economic impacts. There may also be fears and volatility related to the upcoming elections. If it isn’t those concerns, it will be something else. That is just how investment markets work.
We don’t just manage assets. We know there are people attached to these assets. By knowing your goals and what matters to you, we can design portfolios with purpose and perspective. We will do that, as we always have, no matter what comes. We will get through this together.
Feel free to call if you have any thoughts or questions or would just like to talk.