The second quarter of 2020 was one for the history books. COVID-19 caused a global pandemic that led to deaths in more Americans than the wars of Vietnam, Korea, and the Gulf Wars combined, and led to “stay-at-home” mandates that caused a sharp, deep recession in Q2 when nearly 20% of Americans were unemployed.1 In May and early June, after many thought the curve of new coronavirus cases had been successfully flattened, economic reopening occurred across the country. Within weeks the virus spread, however, and the US entered the July 4th weekend reporting record numbers of new cases of over 50k/day.1 This is double the rate seen in mid-May with total cases now totaling 2.8m, up from 200k cases at the end of Q1.1 Reopening plans have been rolled back in many states. Generally, the level of uncertainty regarding the virus is growing, not falling.
Despite this environment, risk assets enjoyed strong rallies throughout the quarter, leading to discussions of the disconnect between Main Street and Wall Street. Backed by massive monetary stimulus from the Federal Reserve, fiscal stimulus from the Treasury, some early success in the reopening and hopes for a vaccine, US stocks had their best quarter since the fourth quarter of 2008.1 US stocks were again led by the large-cap Technology and other popular growth stocks, leading to concerns of narrowing market leadership that has some resemblance to the dot.com period of the late-90’s.
After falling 35% in a matter of weeks before bottoming in March, the S&P 500 Index gained 20.5% in the quarter, its best quarter since 1998.1 Reopening was met with early success as a number of economic indicators were better-than-feared in May and June, including two monthly Nonfarm Payroll reports, as the recent report for June showed unemployment levels falling to 11.3% while 4.8m new jobs were filled.1 Hopes for a V-shaped recovery were also boosted by a strong Retail Sales report in May, 1 leading many to believe the sharp recession that occurred in Q2 could be the shortest on record.
With some progress reportedly being made on several treatments and potential vaccines, many market participants have started pricing risk assets as if the worst of the virus’ impact is over. This was before the onset of what many are calling the “2nd wave” of new coronavirus cases that occurred in mid-June, and before steps had been taken by many states to reverse reopening plans. With expectations that the Federal Reserve will do “whatever it takes” to support the economy and risk assets, investor attention has turned to Congress, as the $600 weekly unemployment benefit from the Federal Government expires on July 31st.1 The passage of another fiscal stimulus bill is an uncertainty entering Q3, but one that is increasingly likely.
The longest-running bull market in history ended in Q1 of 2020 and the shortest-ever recession likely ended in Q2 of this year. Both led to predictable large gains and losses in equities, leaving large-cap US stocks nearly unchanged for the year. While there are still losses in small-cap stocks and non-US stocks, equities have largely already discounted a strong recovery, though the discovery of a vaccine is probably still not discounted. This strikes us as very optimistic. Stocks are expensive and risks are higher now than pre-COVID (more debt, fewer earnings, more uncertainty), but many market pundits feel investors have little choice but to own equities in a zero-interest rate environment where credit spreads are near record lows. We would expect a sharp rally in stocks should a vaccine be announced in the back half of the year, but short of that, we expect future gains to be modest given the starting point of high valuation.
References: 1. Factset 7/8/20