Q2 Blog Feature Image

Q2 | Back in Business, For Now

2020 is proving to be a year to forget. The 2nd Quarter saw Stay-At-Home Orders, Lockdowns, and Protests. All the while, the Coronavirus continued its global march around the world and the U.S became the new epicenter of the pandemic.

2020 is proving to be a year to forget. The 2nd Quarter saw Stay-At-Home Orders, Lockdowns, and Protests. All the while, the Coronavirus continued its global march around the world and the U.S became the new epicenter of the pandemic. At the end of the 2Q 2020 period, the number of deaths from the virus was approaching 130,000 in the U.S. While this number is saddening, data suggests that the rate at which people are dying from the virus has been decelerating since March 23, 2020. This day is significant because this is the day the S&P 500 measured its lowest point since the pandemic began. The S&P 500 gained +19.95% in the 2Q 2020 period, which was the best quarterly return for the index in over 20 years.

How strong were the gains off the bottom?

From March 23, 2020 to the close of the 2Q 2020 period on June 30, 2020, the S&P 500 rallied +38.57%. As stock prices skyrocketed, economic growth declined, and unemployment rose at levels not seen since the Great Depression.

This combination of awful economic data and rising stock prices led many to erroneously believe the stock market had become disconnected from reality. While there is a level of truth to this, it is important to remind ourselves that the market and the economy can and will at times move opposite one another. Stock prices reflect expectations of what is going to happen and discount a company’s future earnings and cash flows back to a price today. What is currently happening in the economy, or to any company, is generally irrelevant for stock prices.

In our 1Q 2020 commentary, we anticipated that economic data would “fall off a cliff.” The market accounted for this in the 1Q 2020 period when the S&P 500 declined 34% from February 19, 2020 to March 23, 2020. As such, there was never a disconnect from reality within stock prices. The strong gains during the 2Q 2020 period are reflective of the expectation of improving economic conditions ahead. Confirmation of this can be seen in the early 2Q 2020 reporters within the S&P 500 that released financial results during the month of June. Collectively, those early 2Q 2020 reporters have had the best changes to their earnings expectations we have measured in any quarter over the past ten years. Turning a light switch off on the economy and then flipping it back on can do that.

What about bonds?

10yr U.S. Treasuries began the year with a yield of 1.92%. By the end of the 1Q 2020, the yield dropped to 0.70%. At the end of the 2Q 2020, the yield was 0.66%. This means global investors, especially during the 1Q 2020 period, became so fearful they ran into the safety of bonds willing to lock in an interest rate below 1% for the next ten years. This should reinforce how much fear there remains in financial markets. Perhaps with COVID-19 cases spiking across the south, investors remain wary that a second wave of business closures could come. If so, that would be detrimental to future earnings and likely lead to lower stock prices. On the positive side, mortgage rates are at historical lows and there has never been a better time for borrowers to refinance.

Outlook for 3Q 2020:

We expect poor economic growth for the remainder of the year, possibly longer. The good news is that the market also anticipates this and will have factored it into prices many months ago. The key will be the economic data getting “less bad” through year end. Remember, less bad is not the same as good, but is an improvement. Under improving economic conditions, it is plausible that stocks hit new all-time highs before year end. Based on this, we continue to favor risk adjusted stock exposure at this time.
The biggest wildcard remains COVID-19. If the death rate accelerates, then the odds of a second wave of business closures increase. This would be terrible for future earnings and stock prices. Unfortunately, there are already indications that both of these are happening. We are monitoring the virus statistics and all the other pertinent data for financial markets very closely.

Share this post

Share on facebook
Share on twitter
Share on linkedin
Share on pinterest
Share on print
Share on email

Important Notice

You are now leaving the Auxin Group Wealth Management, LLC (“Auxin Group”) website and will be entering the Charles Schwab & Co., Inc. (“Schwab”) website.

Schwab is a registered broker-dealer, and is not affiliated with Auxin Group or any advisor(s) whose name(s) appear(s) on this website. Auxin Group is independently owned and operated. [Schwab neither endorses nor recommends Auxin Group, unless you have been referred to us through the Schwab Advisor Network®. (This bracketed language is for use by Schwab Advisor Network members only.)] Regardless of any referral or recommendation, Schwab does not endorse or recommend the investment strategy of any advisor. Schwab has agreements with Auxin Group under which Schwab provides Auxin Group with services related to your account. Schwab does not review the Auxin Group website(s), and makes no representation regarding information contained in the Auxin Group website(s), which should not be considered to be either a recommendation by Schwab or a solicitation of any offer to purchase or sell any securities.