On the heels of a tumultuous 1st quarter, stocks continued a bounce begun in late-March to post strong returns over the three months ended June 30, as the benchmark S&P 500 index appreciated nearly 20%. As ever, stock prices exhibited an ability to climb a proverbial wall of worry toward higher levels. Despite recurring headlines about the spread of Covid-19 and extremely poor economic data, the patience of investors who stomached the fastest bear market in history bore fruit. Bull and bear markets are only clearly evident in hindsight, but major pullbacks can present an opportunity to buy shares in high-quality firms at discounted prices. Many investors looked at this year’s selloff as an opportunity to do exactly that. The stock market is a forward-looking mechanism, often focusing twelve to eighteen months ahead, and the now rallying market anticipates an expected future recovery.
There is no sugar-coating the 2nd quarter economic data. Early data on many indicators was shockingly poor. However, the numbers are improving, and it is the trend and direction in economic activity that matters for investors. Economic activity levels have improved more quickly than forecasters anticipated, as evidenced by the seven million total people hired during May and June. A key national manufacturing gauge has also signaled a return to expanding activity. These upside surprises may have a positive psychological impact on consumers and businesses and beget further upside surprises. The US populace is forging ahead in resiliently adapting to the new reality. The path to recovery will likely be a journey rather than a sprint, and there’s already progress being made on that journey. The consensus expectation is for positive GDP growth to return in the 3rd quarter.
The Information Technology and Consumer Discretionary sectors topped S&P 500 sector performance during the 2nd quarter. Tech continues to draw on demand for connectivity and also benefits from the secular winds of digital transformation and 5G and Cloud infrastructure buildout. The markets also priced for increased discretionary spending as consumers shift priorities from stockpiling staples for stay-at-home. Staples resultingly lagged, as did fellow defensive sector Utilities. Index-topping Energy and Materials performance reflected improving crude oil prices on OPEC supply cuts, though year-to-date returns in Energy have been abysmal. Communication Services continued to benefit from home entertainment demand that offset the impact of on-screen production being halted. Health Care lagged as Covid-19 put a focus on pharmaceuticals but limited unrelated care and procedures. Ultra-low interest rates weighed on Financials, but banks’ strong balance sheets should enable them to support economic growth to a greater extent than in 2009. Investors have continued to focus on how corporate earnings will react to improved future economic growth.
As the duration of Covid-19’s impact remains unknown, the Federal Reserve stands willing and able to provide additional support to boost economic recovery. Congress will likely also offer additional stimulus as needed. The stock market will have its up days and its down days, but the sheer movement to date in 2020 has boggled the mind. The S&P 500 has witnessed some of its best and worst single days on record, at times in quick succession. The violent shift from “risk on” market sentiment to “risk off” and just as quickly back to “risk on” has whipsawed investor psychology and emotions. Making prudent investment decisions removes emotion as a factor, instead focusing on longer-term fundamentals rather than short-term volatility. This year’s rapid market reversals in both directions illustrate the difficulty of successfully timing market turns and the prudence of riding out the proverbial storm by owning shares in high-quality companies. Innovative and adaptive companies weather those storms and emerge stronger when the storm subsides, aided by durable balance sheets and cash flows. Innovation and adaptability have been key factors in the stock market’s historic ability to serve as a tremendous wealth creation engine. Over the long-term, that trend should continue.