Quarterly Market Update 6.30.2020
The U.S. stock market was up 21.98% in the second quarter of 2020, producing an incredible “v shaped” recovery from the first quarter which was down -20.57%.
This market crash reinforced the lesson of past market crashes: when the market drops suddenly and rapidly the best thing you can do is nothing! Do not even look at your account! The market will recover and so will your account.
We are not out of the woods. The volatility will remain to be sure. Most of the volatility has been a product of the rapid, skyrocketing recovery in the stock market. The stock market is up 40% from the low point in March, and only 7% off all time highs. This rapid recovery has investors concerned the market has been getting too far ahead of itself, and stocks that were recently unbelievably cheap are now becoming over-priced. There have been several one day drops during this recovery followed by the market moving higher, which is normal market activity, especially given the recent volatility.
The stock market is ultimately driven by corporate earnings: the profits of public companies. First quarter earnings were devastated by the shutdown. Many companies did not provide forward guidance. Second quarter earnings estimates are the worst since 2008, but many experts expect earnings to outperform estimates. Even though earnings are terrible, the stock market is rising based on investors sentiment that stock prices will continue to rise.
The U.S. economy is in recession. The definition of a recession is when the economy experiences two consecutive quarters of negative growth. The first quarter was negative, and the second quarter will be negative. But as States re-open economic growth will return to positive and should be much higher than normal. Of course, economic growth is tied directly to re-opening of individual States, which is occurring as originally described: gradually and not necessarily in a uniform manner.
The unemployment situation was horrible when the shutdown started but is recovering at much faster pace than anticipated. That is a sign the economy is recovering.
The Federal Reserve and the U.S. Treasury have taken extraordinary, unprecedented measures to stabilize the economy and market by giving stimulus to many businesses and taxpayers. These actions have achieved results, although the cost was over $3 trillion and was added to our existing debt of over $23 trillion. Additional stimulus is being discussed.
The media is Covid obsessed. It is unfortunate the data is not always reliable and the “science” changes. The most important news is that now a vaccine is expected by the end of this year. Once a vaccine is produced, the system is already in place to mass produce and distribute it. There are also several therapies in development and already in use that are providing relief and a quicker recovery.
The market and economy are recovering. The market, which is forward looking, is recovering much faster than predicted. The economy is recovering but the pace of recovery is being dictated by the re-opening of the individual States, which is based on the local conditions, which are constantly changing.
Investors should remain invested in a diversified portfolio that matches their own risk tolerance. Please contact me if you have any questions or need any help.