Market Data for the quarter ended June 30, 2020:

  • S&P 500 Stock Index: 3100, up 19.9%
  • Ten-year Treasury Note Yield: 0.65%, down 0.05%
  • Gold: $1,798 per ounce, up 13.0%
  • Oil: $40 per barrel, up 99.1%

Stocks rallied powerfully in the second quarter of 2020.  Massive monetary and fiscal stimulus flooded markets with cash, and the first wave of the pandemic crested in April, leading to a partial snap back in economic activity. Corporate bonds and industrial commodities, such as oil, similarly posted strong returns. Gold continued to rally, driven by ultra-low interest rates, while Treasury bonds held firm with investors seeing central banks keeping short-term interest rates at zero, or below, for an extended period.

Moving into the second half of the year, we see the potential for further gains in stocks to be limited. Simply put, our view is that investors are underestimating the time it will take to fully recover from the pandemic given the immense scale of the blow taken by the economy and the fact that the pandemic is still rampaging through parts of the United States and globally.

Returning to the second quarter rally, the shock and awe of the monetary and fiscal response to the crisis drove financial markets higher early in the quarter from deeply depressed levels. Subsequently, following the cresting of the first wave of the virus in April, economic data ranging from employment, to retail sales, to housing snapped back much more quickly than investors had anticipated. This, in conjunction with continued monetary and fiscal stimulus, drove markets higher through quarter end.

However, if investors think the pace of economic recovery seen over the past two months will be maintained going forward, they are likely in for a disappointment. The partial re-employment of retail and hospitality workers was low hanging fruit for the economy, while the March and April lockdowns created significant pent up consumer demand. With those two sources of recovery being exhausted in the months ahead, a full recovery will likely not take place until the second half of next year, at least. This is in no small part due to the fact that the pandemic is nowhere near being brought under control, and significant social distancing measures will likely have to remain in place until a vaccine is developed and widely distributed. In such an environment, a complete recovery of economic activity is not plausible.

Our take is that this reality will put a cap on stock market returns for the remainder of the year. Furthermore, if the pandemic worsens, a significant pullback in stocks is possible. An additional risk factor to keep an eye on is the expiration of fiscal relief measures early in the coming quarter. While fiscal relief, along with monetary policy, has been a pillar of the economic and market recoveries seen thus far, the economy is in no position to have it removed with the unemployment rate still standing in the double digits. As the political climate has deteriorated over the past three months, we cannot assume that the extension of fiscal support will be seamless. We may have to see further economic and market pain before Congress and the White House come together to act.

For the remainder of the year, we see the market, as represented by the S&P 500 stock index, trading in a range of 2800 to 3300. It closed the second quarter at 3100. Internally, we are positive on high quality income stocks in the healthcare, telecommunications, and utility sectors. Throughout the first half of the year, investors have been focused on the massive growth stocks that lead the Nasdaq, such as Apple, Amazon, and Microsoft, while neglecting stocks which produce substantial current income. Over the longer-term, investors will return to appreciate the virtues of income producing equities, and we anticipate higher share prices along with a healthy stream of dividends in the meantime.

As always, thank you for the confidence you have placed with us. Please do not hesitate to reach out to us with any questions or concerns you may have.