Markets in Review

The financial markets went into overdrive as investors tried to predict the economic impact of both the coronavirus and the subsequent governmental fiscal and monetary response, especially as it relates to certain hard-hit industries like travel, retail, and restaurants. Despite all the negative headlines of increasing COVID-19 cases, rising unemployment, and social unrest during the quarter, the equity market, as measured by the S&P 500 Index, had its best quarter since 1998 as investors focused on global governmental stimulus, positive reports on the progress of a vaccine, re-opening of many state economies, and recovering retail sales and manufacturing data.

The equity market indices rebounded significantly in the second quarter with the tech-heavy NASDAQ returning 30% and the S&P 500 and Dow Jones Industrial Average posting gains of nearly 20%. Small- and mid-cap companies, as measured by the Russell 2000 Index and Russell Midcap Index, were up even more than the broad indices during the quarter, returning 25.4% and 24.6%, respectively.

Growth stocks continued to significantly outperform value stocks across all market capitalizations during the quarter as the technology and consumer discretionary sectors outpaced more value-oriented sectors like financials and industrials. While all S&P 500 sectors were in positive territory during the second quarter, performance varied significantly by sector, with consumer discretionary stocks leading the way with a 32.9% return and utility stocks lagging with a 2.7% return. Over the prior 12-month period there was a 72% return spread between the best and worst-performing sectors (Technology +36% and Energy -36%).

Foreign equity markets also posted strong returns in the second quarter with the Developed and Emerging Markets indexes up 16.3% and 18.1%, respectively.

The fiscal and monetary response to the coronavirus was swift and had a positive impact on the fixed income markets during the quarter with the Barclays Aggregate Bond Index up almost 3%. While investors fled to safety and piled into Treasuries in the first quarter, risk appetites returned in the second quarter as the Federal Reserve’s aggressive monetary policies fueled a rally in corporate and high yield bonds.

First quarter GDP fell 5.0% and the advance estimate of second quarter GDP shows U.S. economic growth falling by 32.9% due to falling consumer spending, states contending with a resurgence in COVID cases, and many travel restrictions remaining. Two consecutive quarters of negative GDP growth officially qualifies as an economic recession. This will mark the first recession since 2008/2009.

The U.S. unemployment rate dropped to 11.1% in June 2020, falling from an all-time high of 14.7% reached in April. Recent studies show that over 60% of those on unemployment benefits are making more than they were pre-COVID as a result of expanded benefits, so the numbers are likely skewed as many have chosen not to look for work or are waiting to be called back to their previous employer as the economy reopens.

During the second quarter, the Consumer Price Index grew at 0.6%, down from 1.5% the previous quarter. Increases in food prices were offset by declining energy prices. Apparel and transportation service prices declined by 7% over the past year while medical care services prices experienced the largest increase at 6%.

Sources for quoted statistics: U.S. Bureau of Labor Statistics, Federal Reserve, and Wall Street Journal.

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