Capital Markets Commentary | Capital Markets Update Q2 2020
After a devastating first quarter where equity markets experienced the fastest decline since the Great Depression, global equity and credit markets rebounded with the S&P 500 posting its best return since the fourth quarter of 1998. Aggressive central bank policy, coupled with hopes that economic indicators have bottomed, fostered a market rally. Since the March 23 market low, the S&P 500 has rebounded 39.3% leaving the index with a 3.1% decline for 2020.
- Growth continued to dominate global equity markets. The Russell 1000 Growth Index (27.8%) almost doubled the return of the Russell 1000 Value Index (14.3%).
- Federal Reserve purchases of U.S. corporate debt through the Secondary Market Corporate Credit Facility bolstered returns as as investment grade bonds rose 9.0% and spreads tightened to 1.5%.
- Energy stocks, the worst performing equity sector in the first quarter, sharply rebounded as one of the top performing sectors. MLPs gained 50.2% for the quarter, but are still down 35.7% for the year.
- As investor sentiment shifted to favor risk assets and COVID-19 was contained in most developed markets except the U.S., the dollar declined relative to most non-U.S. currencies.
- The market shifted away from quality leaving U.S. Treasuries with only slight gains for the quarter which significantly lagged almost all other fixed income sectors.
- Value strategies posted positive returns but were hindered by below-market gains of financials and utilities, and a lack of exposure to market-leading technology names. Over the past year, value now underperforms growth by 32%.
A great debate over the shape of the economic recovery transpired in the popular financial press over the past quarter. Would we experience a quick V-shaped recovery? A more drawn-out U? A choppier W? A more pernicious L? If we are to believe the forecasting abilities of the equity market, the early answer appears to be a V.
The S&P 500 fell 34% between February 19 and March 23. With massive amounts of monetary and fiscal stimulus in hand, the S&P 500 recouped an impressive 77% of its drawdown by the end of June. The S&P’s second quarter return of 20.5% was only the fourth time in the post-war era a quarterly return exceeded 20%.
Economic indicators have improved as the world re-opened businesses, but a resurgence in COVID-19 cases poses new risks—leaving the investment outlook highly uncertain.
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Investments in securities are subject to investment risk, including possible loss of principal.
Bonds are subject to interest rate, price, and credit risks. Generally when interest rates rise, bond prices fall.
Investments in commodities may have greater volatility than investments in traditional securities.
Investments in emerging markets may be less liquid and more volatile. Additional risks include currency fluctuations, and political instability.
Equity investments are more volatile than bonds and subject to greater risks. Small- and mid-cap stocks involve greater risk than large-cap stocks.
High-yield fixed income securities are subject to liquidity and credit risk, and tend to be more volatile than investment grade fixed income.
Unless otherwise noted, all data herein is as of July 6, 2020.