As the second quarter of 2020 draws to a close, much has changed since the coronavirus pandemic led to a global lockdown in March. Economies in the US and globally have started reopening, and we have begun to see a return of economic activity. Stocks have rebounded strongly, although still displaying a heightened degree of volatility, and bond market liquidity has improved from the worst of the crisis. However, uncertainty remains as virus rates continue to increase in the US and emerging markets.
The Pandemic Continues
As it appeared that rates of infection were flattening in the US, many states began reopening in the second quarter. While northeastern states appear to have had better containment of the virus, a number of western and southern states have seen soaring numbers, leading to record new reported cases in the US as a whole. Health officials continue to warn that the worst may be yet to come. As a result, many states have paused on reopening and some are requiring quarantine for visitors from harder hit states.
Globally, Asia and Europe have also begun reopening their economies, as infection rates appear to be under better control. Emerging markets, especially in the Americas, continue to see rising numbers of new cases.
Restarting US and Global Economies
As states have begun reopening, retail sales rebounded as consumers had more spending options after sitting on the sidelines for weeks. Manufacturing has also gained traction as new orders and production have gained and exports have increased. These improvements are coming off of the very low levels hit during the shutdown. Construction spending has lagged and the real estate market has been mixed, but generally strong, as buyers find homes for sale in short supply.
Unemployment continues to be top of mind, with June’s unemployment rate coming in at 11.1%, down from a high of 14.7% in April. Job creation resumed in the construction and hospitality industries, and small business hiring has outpaced that of larger firms. Saving jobs in small businesses also continues to be a focus, with the payroll protection plan (PPP) recently extended by five weeks.
Another stimulus bill, including the extension of enhanced unemployment benefits, continues to be debated in Washington and renewal of the aid programs could be key to sustaining the confidence of investors. Infrastructure spending is also being proposed as a way to jump start economic activity although little progress has been made.
Internationally, economic releases were mixed in the quarter. A number of countries have seen manufacturing growth return, including China and Australia. The Eurozone has also seen better numbers as economies have begun to reopen. Japan and Italy have shown continued weakness. Emerging markets continue to suffer from inadequate health care systems, weak external demand and the effects of low oil prices.
Tensions over Chinese relations in Hong Kong have dominated recent headlines, as China passed new national security laws banning sedition, secession and treason for the territory and has started cracking down on activism. The new laws may limit Hong Kong’s ability to maintain freedoms guaranteed when its British colonization ended and jeopardize its position as a major financial hub.
Stocks Rebound
Domestic stocks rebounded sharply in the second quarter, with the S&P 500 Index gaining 20.5%, erasing much of the prior selloff to finish the first half of the year only down -3.1%. A number of factors contributed to the upward swing in the markets, including optimism over reopening, better than expected employment figures, improving economic activity, efforts to find a vaccine and benefits from stimulus packages. Retail investors have also taken advantage of depressed prices to increase stock holdings, possibly elevating the rebound. Volatility has continued and markets saw some down days in June as infection rates started to rise.
International markets have benefitted from many of the same factors as US markets and were up strongly in the quarter, with the MSCI All Country World ex-US Index up 15.4%, to finish the first half at -12.4%. All of the major global areas saw strong double-digit growth in the second quarter, but lag the US in year-to-date returns, with China as the exception (the MSCI China Index was up 3.7% for the first half of the year after a +15.5% second quarter).
Bonds Stabilize
Both taxable and municipal markets gained over 2% in the quarter, with bond markets stabilizing as economic activity resumed and the Federal Reserve grew its balance sheet, stepping in to buy bonds as part of its emergency plan. The closely followed Barclays Aggregate Bond Index finished up 6.1% for the first half of the year, and the Barclays Muni Bond Index was up 2.1% for the first half.
Inflation remains muted but is forecast to increase gradually in 2021 as economic activity recovers and demand improves while the market is flooded with currency from support programs, deficit spending and near-zero interest rates.
The Election
The upcoming Presential election has begun to garner more headlines as we get closer to November. President Trump trails Joe Biden, the now presumptive Democratic candidate, in a number of key states. The election outcome will be material for investors if it dramatically alters the tax and regulatory landscape from the current market-friendly levels.
Looking into the Third Quarter
While US GDP growth forecasts for the third quarter are positive, which would mark the end of the shortest recession on record, there continues to be uncertainty over the economic rebound’s continuation as virus cases continue to grow. The International Monetary Fund (IMF) estimate for global growth in 2020 is -4.9% and concerns over public debt levels are growing.
Second quarter company earnings reports will begin in the coming weeks. Some strategists are forecasting an improved earnings outlook in the face of more optimistic sentiment as companies are beginning to reopen or expand operations. Estimates for the remainder of 2020 continue to show depressed profits, but with the potential for a rebound in 2021. Much of the path forward will depend on containment of the virus and the continued reopening of both the US and global economies.