DWM 2Q20 Market Commentary

July 08, 2020

Seems like an eternity since our last quarterly market commentary. Frankly, there was a lot of fear in the air back then as we started the second quarter of this 2020 calendar year, which for many of us will go down as the most bizarre year ever. But since then, thanks to more scientific understanding of Covid-19 and the unprecedented federal stimulus/support around the globe, the level of fear has dropped as adaption to this new world full of uncertainty sets in.

We all know that the economy came to almost a stand-still in March while governments imposed stay-at-home rules to fight the virus. High frequency data showed that the economy started to turn for the better in late April and significantly in May. Gasoline usage which was down about 50% versus last year at its worse reading is now down only about 9%. Railcar and hotel occupancy has been up six weeks in a row. We’ve recovered already 1/3 of the jobs lost, with the latest unemployment reading at “only” 11.1%. Things are certainly better than they were and the first part of this “recovery” can be viewed as V-shaped. But the “bounce” may turn into a “crawl” before we’re completely out of these Covid woods. But before we talk more about the future, let’s look at how 2Q20 fared for the major asset classes:

Equities: After their worst quarter in multiple decades, US stocks rallied back with the Dow Jones having its best quarter in over 3 decades, up +20.5%! This rally has cut the loss on the year for the Dow to 9.6%. The S&P500, a market-cap weighted benchmark, is now only down -3.1% for the year, boosted by the big names like Amazon, Apple, etc, that actually excelled during these pandemic times! International equity* and emerging markets** also recovered, up 16.1% and 18.1%, respectively. Pretty much every shade of equity significantly rebounded in the second quarter, and as you can see from the charts below, growth has continued to dominate value in unprecedented ways. Further, there has been little rotation from the areas that underperformed in the pandemic-driven March sell-off, and as you can see on the chart below left, large cap growth has seriously outperformed in 2020. Whereas we continue to like that area given its quality and size component, there will be a time in the near future where we should expect a reversion to the mean.    


Fixed Income:  With the Fed coming to the rescue and buying not only corporate bonds but even some high-yield bonds, the fixed income asset class basically had and has a support floor. High yields*** shot back up, + 10.2% on the quarter and now off just 3.8% for the year. The Barclays US Aggregate Bond Index, a more broad but domestic-only proxy made up of corporates, agencies, and Treasuries was up 2.9% for 2Q20 and now 6.1% Year-to-Date (“YTD”). International fixed income exposure also fared decently as evidenced by the Barclays Global Aggregate Bond Index showing a 3.3% 2q20 return and now +3.0% YTD.

Alternatives:  Alternatives also enjoyed the rebound, as evidenced by the Morningstar Diversified Alternatives Index, +6.5% for the quarter and now off only 8.2% for the year. Those alts with higher equity beta like real estate****, +9.3% did really well, but still down on the year. Then again, gold+, traditionally a safe haven/risk-off play, continued to “shine”, up 12.7% QTD & now up 16.3% YTD.

Going forward, as for the economy and the stock market, the worst should be behind us with 2Q20 being the bottom in terms of corporate earnings. There most likely will be a slow-down of US reopening efforts as we battle a surge of new cases, thus why the recent “bounce” may turn into a “crawl”. But with more treatments for the virus as well as hopes for a successful vaccine and distribution to the masses by the first quarter of 2021, we probably won’t be going back to the strict nationwide lock-downs that stalled out the economy. Further, there should be another stimulus effort (maybe worth $1 Trillion) on the way in the next several weeks. We know that Republicans and Democrats recently haven’t really been on the same page, but it’s definitely in both of their (and everyone’s) best interests to get this new bill done. This stimulus (and maybe an additional one) is a necessary “band-aid” to bridge us to probably late 2021 when Covid has been effectively controlled. It will be fun to see that not only that happen, but the economy to come out of its “crawl” and most likely “surge” at that time as well. All that said, and knowing that the stock market is forward-looking, we think a “double-dip” is highly unlikely, but we know that uncertainty brings enhanced volatility/choppiness, so expect more not only big up days, but also big down days as we muddle to the other side… 

The first half of 2020 was marked by shock and awe and lots of scrambling. On the other hand, prudent investors that stayed the course did not get destroyed in the frenzy. Which is why we want to reiterate some basic investment principles, the same ones we preach at DWM:

  1. It starts with a financial plan – implement a successful plan tailored to your goals with realistic assumptions and revisit that plan regularly and make changes accordingly to keep it successful.
  2. Understand your risk tolerance and apply that when establishing your long-term asset allocation target mix.
  3. Stay disciplined and fully invested in adherence with that long-term asset allocation target even during times of stress, taking advantage of significant market fluctuations by rebalancing.
  4. Remember that diversification, while not sexy and may not appear great in the short term, works over the long term. You won’t be able to gloat about your “home runs” on the Friday Zoom happy hour, but your portfolio will never get torpedoed from unforeseen risk.
  5. Slow and steady wins the race: If you followed principle #1 above, you shouldn’t need those “home runs” and can achieve all those goals, thus giving you peace of mind.

And what can be more satisfying in such uncertain times like these than peace of mind…

2020 DWM Client "Peace of Mind" Photo Contest Winner

Those not following these basic principles are probably feeling stressed, anxious, nervous, and other negative feelings. Find your path to “peace of mind” by working with a professional advisor like DWM and stay well.    

 Brett M. Detterbeck, CFA, CFP®


*represented by the MSCI AC World Index Ex USA
**represented by the MSCI Emerging Markets Index
***represented by the Bloomberg Barclays US Corporate High Yield Bond Index
****represented by SPDR® Dow Jones Global Real Estate ETF
+represented by the iShares Gold Trust