Second Quarter 2020: Federal Intervention Masks Underlying Economic Uncertainty
Rising Covid-19 cases, mass unemployment, and stop-start reopenings have hurled uncertainty at the markets and yet, the S&P is down only 3% for the year-to-date ended June 30th. The second quarter rally, with the S&P rebounding 20%, has notably amplified one familiar market trend of the recent past, growth’s continued dominance over value. Whatever your preferred alphabet soup acronym for Facebook, Apple, Amazon, Netflix, Google, and Microsoft, the tech-heavy giants have been the comfort food for investors in the Coronavirus world, pushing the Russell 1000 Growth up a remarkable 10% for the year. U.S. value stocks, as measured using French and Fama data, are in their longest and second sharpest relative drawdown since 1933. Similarly, any portfolio tilts away from the large American tech giants and towards small-cap or international markets have hurt relative performance for the quarter and year. Broad international markets are down approximately 11% for the year while the Russell 2000 is down 13%.
Easing financial conditions in the second quarter helped risky bonds rally as the market responded to the promise of support from the Federal Reserve and Congress. Investment-grade US companies are currently able to raise debt at all-time low yields and many did just that, as new bond issuance hit record levels during the quarter. Yields on safe U.S. Treasury bonds were largely unchanged or slightly down for the quarter, reflecting expectations for a low-growth, low-inflation world in the immediate term. Interestingly, despite the record stimulus, market expectations for inflation remain well below the Federal Reserve’s stated 2% target.
Like always, what is in store for markets the rest of the year is anybody’s best guess, especially with the U.S. entering into election season and governors left grappling with budget holes and rapidly increasing Covid-19 case counts.