July 2020 –


June 2020 Market Update



The first three months of 2020 witnessed the fastest bear market in history. U.S. stocks declined 34% from February 19 to March 23. During the second quarter (April to June), U.S. stocks staged one of the fastest bull markets in history. U.S. stocks returned 39% from their March low to June 30. As shown in the chart, the stock recovery is V-shaped.  As discussed in the Economic News section below, stocks anticipated the V-shaped economic recovery in May and June, spurred by the global reopening after several months of lockdown. Stocks are long-term assets and discount both current AND future earnings expectations. This partly explains the initial disconnect between the extremely weak economic conditions (when economies were virtually shut down) and rising stock prices. Stocks were looking ahead to the subsequent economic recovery.

After a significant stock rally in April and May, U.S. stocks have recouped the majority of the COVID related sell-off.  As discussed in the March Market Commentary, the length and depth of the bear market would hinge on whether the economic contraction was event driven and temporary or reflective of more systemic risks similar to the multi-year financial crisis bear market from 2007-2009. So far, stocks have largely looked beyond the COVID impact on the economy and 30 million U.S. job losses. The bar is certainly raised and companies need to deliver accelerating earnings growth as the economy recovers. Stock valuations also reflect an expectation that the Federal Reserve and the government will backstop any economic pullback.

After an exceptional early summer rally, U.S. stocks are close to flat for the year – a remarkable feat in light of a global pandemic. U.S. stocks are down 3.5% in 2020 but have returned 6.5% over the past year. Foreign stocks have also recovered a substantial portion of the selloff but have lagged the U.S recovery and are down 11% year-to-date. Bonds have remained a strong source of diversification and opportunity, particularly corporate bonds, and have returned 5.4% year to date.  A rotation to less volatile investments and a dramatic cut to interest rates by the Federal Reserve have supported bond prices.


U.S. Stock Chart (S&P 500 Price Index)

Source: Bloomberg


ECONOMIC NEWS: Stimulus, Stimulus, Stimulus

Quick and decisive fiscal (e.g. unemployment benefits, stimulus checks) and monetary (e.g. interest rate cuts, quantitative easing via bond buying) actions both in the U.S. and globally have allayed fears of free-falling economies, illiquidity, frozen capital markets, and deepening employment headwinds. The combined stimulus actions of the U.S. Federal Reserve and U.S. Federal government is now estimated at $7-$9 trillion, or 30% to 35% of the U.S. economy (2019 GDP). This is the largest stimulus ever, five to six times larger than the stimulus efforts during the Great Financial Recession of 2007-2009. In a truly unprecedented response, Federal Reserve actions include buying junk bonds and underwriting small business loans with no credit history consideration. While these efforts to support the economy do not guarantee a rapid recovery to pre-COVID levels, aggressive stimulus measures have reduced the probability of a worst-case economic fallout scenario.

Similarly, swift lockdown efforts reduced the probability of a worst-case healthcare scenario. In March, New York City and Northern Italy served as proxies for the battle versus the virus, and both were able to manage through the surge in cases. This does not diminish the fact that lives were lost and families forever impacted. But, a global wave of hotspots did not occur, which reassured investors that the presence of the virus and economic growth were not mutually exclusive.  As investors gained confidence that central banks and governments would do whatever is necessary to support the economy, attention shifted to reopening efforts, hiring trends, and economic recovery indicators.

Economic indicators have performed better than expected which has further supported a stock recovery. May and June indicators including manufacturing surveys, payrolls, real estate transactions, commodity prices, restaurant reservations, airline reservations, retail store traffic, consumer spending, and business spending all exceeded expectations. Similar to the V-shaped stock market recovery in the second quarter, economic indicators are pointing to a rapid V-shaped economic recovery, albeit off extremely low levels of activity. After a month of reduced car travel, the chart shows a V-shaped recovery in gasoline supplies for April, May, and June, and serves as a reasonable proxy for the initial economic bounce from lockdown conditions.


Economic Indicators: Travel and Gasoline


As states reopen, economic activity is expected to increase. Improving economic conditions coupled with an accommodative Federal Reserve creates supportive business conditions. In previous Market Commentaries, periods of strong stock performance were best summarized by the mantra Do Not Fight the Fed. The Federal Reserve’s unprecedented actions are flooding markets with funding and liquidity hoping this cheap capital is reinvested in risk-seeking assets such as stocks. Since the March U.S. stock lows, markets have heeded this advice and responded accordingly. But, the stock recovery has certainly raised expectations for a robust economic recovery occurring.  Several items will determine whether the V-shaped recovery in stocks is supported by a sustained economic recovery.



  1. Virus Trends. New virus hotspots have emerged. Florida, California, Texas and Arizona are experiencing all-time highs in COVID related cases and hospitalizations. Other states in the South and West are also experiencing surges. These states are taking precautionary measures to combat the spread. Texas has ordered masks to be worn in public. Prohibitions on in-house dining have been extended. Large group gatherings are restricted. Will these types of measures suffice? Another wave of lockdowns would jeopardize the economic recovery.

  2. Vaccine and Virus Treatment. The stock market rally is partly premised on the virus as a one-time manageable event. Absent a vaccine and virus treatment drugs and measures, the virus could linger for years and impede a full economic recovery.

  3. Economic Trends. As previously discussed, economic indicators point to a V-shaped recovery. Part of the V-shape recovery is the easy comparison with the low base of economic activity during the shutdown. Many hotels had no occupancies, flights were grounded and stores were closed. Will the recovery curve flatten?

  4. Stimulus Trends. Consumer spending has held up better than expectations. The extension of unemployment benefits to more classes of workers and an increase in the amount of unemployment benefits have helped offset lower employment income. The stimulus check sent to most American families was spent and may be a one-time economic boost.   Will these “one-time” benefits continue (it is an election year)?  Will job growth and related income offset lower future stimulus measures? When will the Federal Reserve ease support?

  5. Market Valuation. Stocks are not cheap versus historical valuation measures. This has spurred talk of a bubble in stock valuations. Stocks are certainly more expensive than the average 5, 10 and 15-year multiples using current-year earnings. But, current profits are depressed. Earnings tend to fall faster than the economy does but they also recover faster. Valuations look more reasonable using forward year earnings and future years. Also, stock multiples tend to expand when interest rates are low, and current rates are at all-time lows in the U.S. However, the bar is certainly raised with stock valuations looking through the near-term earnings pressure. The economy needs to deliver.