June 30, 2020
The stock market is said to trade based on “forward looking indicators,” not on historical valuation metrics. That has likely never been more true than during the rampant rally that we experienced in the second quarter of 2020. Despite historically high unemployment, huge drops in economic activity, and ongoing uncertainty about how and when aspects of the economy will resume from the COVID lockdowns, investors looked forward to possibly brighter days and stocks rallied with a 20% quarterly gain for the S&P 500 index. A similar resurgence impacted Mid/Small Cap stocks and Foreign stocks, with double-digit gains being common in many broad stock indexes.
After dropping over 33% from the peak in February to the lows of late March, the S&P index gained back a huge part of that loss in the late first quarter and most of the second quarter before easing up in later June to finish with that 20% gain. We are still below the all-time highs from February, but the rally provided the largest 50-day gain in modern market history. The VIX volatility index (the “fear gauge”) had climbed to an all-time high on March 16th, then dropped over 70% from that high mark before rising back up moderately in mid- to late-June on concerns about virus case resurgence. Oil had another wild quarter, with prices temporarily going negative for specific contracts on oversupply issues, then rallying back to end the quarter at around $40 per barrel.
The Fed has continued to lead an accommodative path, with the Fed Fund rate likely to stay at or near 0% and the Fed commitment to be a bond buyer to keep liquidity high in that marketplace. Treasury rates have stayed very low, with 10-year yields in the 0.60% to 0.70% range as investors both domestic and abroad continue to view that instrument as a safe haven. Corporate bonds and High Yield bonds each provided upside for the quarter with that increased appetite for risk, though volatility for each of those bond types has increased beyond typical levels. Treasuries had a muted quarter following outsized price increases in the panic of the previous period, but they did manage to eke out small gains.
As we look ahead, attention will likely remain hyper-focused on COVID case levels and the impact that rising or falling cases may have on the economy- and particularly on consumer sentiment. Consumers drive over 2/3rds of our economic activity, so both the ability and the willingness to resume our typical purchasing will be a huge indicator of how the recovery out of this COVID period plays out. This is also of course tied to the work on treatments/vaccines, and the willingness of citizens to follow protocols intended to help mitigate the spread as much as possible. The market has priced in a rapid economic recovery, so news perceived as negative can have a sharp impact on values.
We have identified key data points in recent market commentaries. While these metrics will appear quite displaced now from typical readings, here is where they stand:
These blogs are provided for informational purposes only and represent Cutler Investment Group’s (“Cutler”) views as of the date of posting. Such views are subject to change at any point without notice. The information in the blogs should not be considered investment advice or a recommendation to buy or sell any types of securities. Some of the information provided has been obtained from third party sources believed to be reliable but such information is not guaranteed. Cutler has not taken into account the investment objectives, financial situation or particular needs of any individual investor. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor's financial situation or risk tolerance. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.