2Q20 Market Overview
After enduring a painful first quarter, both equity and fixed income markets delivered an exceptional rebound. This stunning second quarter recovery was made possible by the speed, scope and scale of the coordinated global government fiscal and monetary responses to mitigate the economic soft patch Covid-19 created.
As Covid-19 cases increase and researchers intensely focus on better treatments and a vaccine, we will continue to deal with alarming headlines and market volatility. The virus news coupled with the Presidential election uncertainty is sure to make for an interesting second half of the year.
Regardless of the market direction, our rebalancing process will take advantage of the market movements to shift towards our target allocations in the most tax-efficient manner possible while maintaining your desired risk level and fulfilling your cash flow requirements.
U.S. Equity Markets
U.S. equity markets experienced a remarkable rebound with the Russell 3000 advancing 22% during the quarter. Disturbing statistics surfaced during the quarter as one of the longest economic expansions in U.S. history was replaced with one of the worst recessions since the Great Depression. Within the blink of an eye, companies projected and planned for the worst while unemployment spiked from 3% to 15%. before the rebound took hold. The biggest contribution to the recovery can be directly attributed to the extraordinary U.S. government fiscal and monetary stimulus responses. These actions continued to boost confidence that it would do whatever was necessary to avoid a permanent deterioration of jobs and companies. Even though the virus is still not contained, healthy consumers decided to ease back into their routines to jump start economic growth. Moving forward, focus will return to actual company profit margins in light of increasing Covid-19 cases.
International Equity Markets
International developed equity markets finished the quarter with a 14.9% gain for the MSCI EAFE. Under the lockdown limitations, the Eurozone economy contracted by 3.6% before experiencing positive improvements through the spring. Encouraging responses from the European Central Bank added additional support by broadening its pandemic emergency purchase program to 1.35 trillion pounds to jumpstart the recovery. Although Japan continued to experience less Covid-19 cases compared to other developed countries, the global crises spilled over into the Japanese economy. The Japanese government responded with more fiscal and monetary stimulus to help lift equity market returns by 11.3%. The MSCI emerging markets impressive gain of 18.1% was one of the strongest in a decade. Although China underperformed the broader market, their outperformance in the first quarter led to a year-to-date return of 3.6%. Both developed and undeveloped international markets look more attractive from a valuation perspective compared to U.S. markets; however, it will continue to take additional government stimulus to overcome the coronavirus toll and jump start stagnant international economic growth.
Fixed Income Markets
Safety-minded investors experienced positive results as the closely watched Barclays Aggregate rose 2.9% during the quarter. As Covid-19 spread, the Federal Reserve’s timely actions eased fears and led to a quick corporate bond recovery to boost the overall index return. The 10-year Treasury held steady during the quarter and decreased slightly from 0.70% on March 31 to 0.66% on June 30. Given the modest yield drop, US Government securities held steady considering that most of their impressive gains were realized in the first quarter. The Barclays US Government Long posted a 0.28% quarter gain, Intermediate 0.55% gain and Short 0.26% gain. In the international fixed-income arena, the JPM Non-US Unhedged gained 2.4%. The Barclays Municipal finished the quarter with a gain of 2.7% as investors worried less about the economic strain municipalities face.