News & Events
2Q Market Commentary Second Quarter Recap
The equity markets have taken investors on a wild ride in the 1st half of 2020. The historic sell off in March erased over $5.3 trillion in market value from companies in the S&P 500. Yet this dramatic fall was mirrored by an equally historic move to the upside as stock prices rebounded significantly in the 2nd Quarter as both the Federal Reserve and Congress injected unprecedented monetary and fiscal stimulus strategies to provide liquidity and buoy asset prices.
The volatility has also found its way beyond the markets and is evident in economic data as well. Unemployment which had been at a 50 year low coming into 2020 spiked to an 80 year high through May, while June saw the largest number of job gains in a single month ever. Similar patterns also exist in areas such as retail sales and consumer sentiment. In spite of the broad economic deterioration and continued uncertainty around the depth and severity of the COVID-19 crisis, the markets have shrugged it all off and instead focused on an expected return to earnings growth in 2021 and beyond.
As of this writing, the S&P 500 is down just -4.04% year-to-date. There is also a huge disparity amongst investment styles, for example US Large Cap Growth stocks are up 7.12% year-to-date vs. the Large Cap Value sector is down -18.43%, as measured by the Russell 1000 Growth and Value Benchmarks.
Additionally, Fixed Income which had been disregarded by many investors due to the historically low yields available on the heels of the Fed cutting interest rates to near zero, continued to provide ballast to portfolios and is up 6.14% year-to-date as measured by the Barclays US Aggregate. This strong performance of the index was driven primarily by the heavy weighting of longer term U.S. Treasuries which benefit the most from interest rate reductions.
As investors, we seek visibility in the markets to inform us on our decision making processes in order to allocate capital for our clients in the most appropriate and opportunistic fashion. In this period, we do not need to look much further than the actions taken by the Federal Reserve.
While our previous commentaries have touched upon the importance of these actions we’d like to put some context around them. Today, the Fed has applied (and is continuing to apply) monetary stimulus that equates to roughly 40% of U.S. GDP. This has come in the form of ultra-low short-term interest rates, a multitude of credit and lending support programs, and a return to Quantitative Easing which, for the first time, allows the Fed to purchase state and local government bonds, mortgage-backed securities, investment grade and high-yield corporate bonds, in addition to the Treasury securities as it has done in the past.
While the sheer magnitude of the support is impressive, the speed at which these policies were implemented is equally so. To put this into context, it took the Fed roughly seven months to create the Troubled Asset Relief Program (TARP) during the 2008 Financial Crisis. The measures in place today were announced within weeks of their conception and, in our view, is the single biggest factor in why the broad markets have rebounded so quickly.
Congress has also been quick to act. Signed into law on March 27, the CARES Act is a bipartisan bill that created a $2 trillion stimulus package for the economy. This included increased and expanded unemployment benefits, temporary student debt relief, a series of relief programs specifically for the hardest hit industries, and finally, direct aid to households in the form of stimulus checks. While these measures dwarf the $840 Billion stimulus package passed in February 2009, lawmakers seem to understand there is a need for even more action. Though the scale of another package has not been finalized, it is expected the next round will be at least another $1 Trillion.
As we begin the second half of 2020 we anticipate heightened volatility as several unknowns still exist; the resurgence of Covid-19 cases in the US, the general election in November, and US/China relations. We are focused on these three areas of interest, as we believe they will be the primary driver of market movements and the outcomes will certainly inform us on decisions we make related to possible changes in client portfolios.
Each of these come with their own unique risks but also the possibility of opportunity.
While we do not predict a retest of the March 23rd lows, the risks surrounding Covid-19 remain very much on our minds. The resurgence of cases across southern and western states that have re-opened earlier than others is alarming and will likely slow the economic recovery. However, if both State and local governments take the required action to stem the spike in cases, then hopefully the reopening of businesses will occur in short-order, and most importantly, lives will be saved. However, the lack of a cohesive and comprehensive federal response to this public health crisis has led to extreme division on how to best approach the issue, creating confusion among the public and likely prolonging the process of mitigation. We are particularly concerned about the ability for schools to reopen in the Fall as this may prohibit many parents from returning to work, which will further pressure economic activity.
Now that we are just 18 weeks from Election Day, set to take place on November 3rd, investors will begin to focus on the potential outcomes and the resulting implications. As such, short-term volatility is not unusual during general election years and we expect as much this time around especially as current polls indicate the possibility of a change in White House administrations and the potential for a shift in the balance of power in Congress. The different policy initiatives that could come with a Democratic controlled White House and Congress, particularly on tax rates, will likely be a source of volatility as we enter the Fall months.
Lastly, the souring relationship between the U.S. and China should not be overlooked. The threat of sanctions and tariffs is ratcheting up and there is increasing concern about the possibility the two governments will fail to reach consensus on a comprehensive trade deal. This could have a lasting negative impact on a variety of industry sectors and be a further source of pressure on the markets.
Where we see Opportunity:
So how will we navigate the expected volatility and what will we do for clients? A core belief of our investment philosophy in both manager and security selection is a focus on quality and as we have written in our intra quarter commentaries, we still believe in this approach today. Investing with managers that protect capital on the downside best positions client portfolios over the long term. This has held true thus far in 2020.
The chart below ranks the S&P 500 companies into deciles based on their debt to asset ratio, which is a measure of leverage. Companies ranked in the first decile that utilize little to no debt to support their business operations have outperformed all other deciles. As we continue to move through the current recession and eventually into recovery, we believe that the companies with strong balance sheets will continue to lead.
Ultimately, these companies are best positioned to weather uncertainty and take advantage of opportunities that arise from a prolonged economic downturn.
Lastly, we are using the volatility as an opportunity to harvest tax losses in taxable portfolios. Taxes remain one of the biggest drags on portfolio performance over the long term. By realizing losses during market downturns and re-allocating the capital, we can use those losses created to offset any future gains.
We are clearly living in unprecedented times and we face a vast array of social, geopolitical, and health challenges. Though equity market performance has rebounded significantly, uncertainty still remains. Our advice to our clients remains clear and consistent; staying disciplined and sticking to your long-term investment plan will yield the best results.
The Information contained in this document is based on data received from third parties which we believe to be reliable and accurate. YorkBridge Wealth Partners, LLC has not independently verified the information and does not otherwise give any warranty as to the truth, accuracy, or completeness of such third party data, and it should not be relied upon as such. Any opinions expressed herein are our current opinions only. YorkBridge Wealth Partners, LLC is an SEC Registered Investment Adviser under the Investment Advisers Act of 1940 (“Advisers Act”). Registration of an investment advisor does not imply any specific level of skill or training. The information contained in this document is to assist with general planning. Please consult with your own tax advisor and attorney for more specific information.