While we’re only half way through 2020, it’s likely to be the year of superlatives like no other – the worst pandemic since Spanish flu of 1918, the fastest 30% market decline ever, the record stock market volatility as measured by VIX index, the biggest monthly job loss of 20 million in April, and the highest unemployment rate since the Great Depression.
Yet, you would not necessarily know it by looking at the stock market at the end of the first half with S&P 500 being down merely 3% after staging the best quarterly performance in 20 years during Q2 of +20.5%. This was a result of the enormous fiscal and monetary stimulus in the U.S. and across many other major economies around the world, which led to money flowing back into risk assets.
All of the stock market sectors have finished in the green during the second quarter. However on a YTD basis, the performance remains bifurcated, with stocks of companies that enable remote work or benefit from more people staying home performing exceptionally well, while others suffering big declines. Only two sectors – Technology (with the biggest contribution from MSFT and AAPL) and Consumer Discretionary (driven by AMZN) have finished the first half with the positive return. The worst performing sectors YTD have been Energy (after oil prices collapsed in April on sharp decline in demand) and Financials, due to concerns around potential loan losses and low interest rates. Travel and retail industries were also among the worst hit with companies like Hertz, Neiman Marcus, JC Penny and a handful of others filing for bankruptcy, while cruise lines, airlines, and a number of retailers continue to be under enormous pressure from the pandemic.
While U.S. Large stocks (-3.1%) outperformed Small caps (-13%) and International equities (-11%), Gold (+17.1%) and Bonds (+6.1%) have been the best overall performing asset classes during the first half of this year, this underscores the importance of diversification highlighted in our recent blog post.
Looking forward, we see the market locked in the tug of war between bleak economic picture on one side and enormous fiscal and monetary stimulus on the other. Economy has probably hit the bottom in Q2, but the pace of recovery is still uncertain. With many states seeing spikes in infections, the recovery can continue in fits and starts. Valuations are elevated, but we expect the Fed to support the markets in the near-term. Elections, later this year, present their own set of uncertainties, but we expect the fiscal policy to also remain stimulative leading into elections. Finally, growing tensions with China are likely to lead many companies to re-think their supply chains over the coming quarters.
In Equities, we remain very selective focusing on companies with sustainable competitive advantages and strong balance sheets. In REITs, we continue to avoid retail and office space, focusing instead on logistics and cloud providers. In bonds, we position on the shorter end of the maturity curve focusing more on market value stability that we expect bonds to provide in the near-term. While inflation remains low, Gold can continue to benefit from concerns of many Central Banks flooding the markets with liquidity and expanding monetary base.
In this highly uncertain environment, it is very important to have an appropriately diversified portfolio that reflects your needs, preference, and risk tolerance. If you have any questions or would like us to review your portfolio diversification to insure it reflects your current goals, please reach out at any time. We are here for you, and we love hearing from you!
The KKRA Team