Second Quarter 2020: Market Review & Outlook
A risk-on sentiment returned to the U.S. equity market in Q2 with the S&P 500 posting a 20.54% return, its largest quarterly gain in more than twenty years. Aggressive stimulus, optimism about COVID-19 treatments and vaccine progress, and a faster-than-expected bottom then rebound in some economic data all contributed to the strong performance.
From a style perspective, growth stocks continued to outperform value in the quarter, with the Russell 3000 Growth outperforming the Russell 3000 Value by more than 13%. Year to date, growth leads value by more than 26%, the widest margin for a six-month period since 1999.
With regard to market caps, trends reflected the increased appetite for risk in Q2 as investors favored small cap stocks over large. The Russell 2000 returned more than 25% in the quarter versus 22% for the Russell 1000. However, small cap still trails large by more than 10% year to date as larger companies proved to be more resilient amid the chaos of the first quarter.
From a sector perspective, Information Technology, Consumer Discretionary, and Energy fared best in the quarter, each rallying more than 30%. The defensive Utilities and Consumer Staples sectors lagged. For the year to date, nine of eleven sectors are still in negative territory, led by Energy (-35%) and Financials (-24%). Information Technology continues to dominate with a 15% return.
Despite the quarter’s strong performance, economic conditions remain mixed at best. While new unemployment claims have begun to stabilize, the overall level of unemployment remains a concern. Some bright spots emerged, however, with manufacturing and service PMI data rebounding, while the housing market has remained surprisingly strong.
The Federal Reserve remained in focus in Q2, continuing Chair Jerome Powell’s pledge to use “our full range of tools to support the economy in this challenging time.” Following its actions in Q1, the Fed implemented and expanded several lending facilities aimed at both corporate America and Main Street. Despite this support, Powell has also urged Congress, which is already working on an anticipated fifth stimulus bill, to continue its support with additional fiscal stimulus to battle the longer-term effects of the pandemic lockdowns.
Overall, the market has rallied against a backdrop of unprecedented fiscal and monetary stimulus, combined with the reopening of economies. But as economies reopen and the rate of new COVID-19 infections seemingly slows, it seems logical to wonder if there will be a second wave of infections and what the impact of such a second wave will be. We believe the combination of fallout from a second wave, along with fading benefits from fiscal stimulus, volatility around the upcoming presidential election, and continued tension between the U.S. and China are the greatest risk factors for stocks going into the second half of the year.
While it is impossible to predict what will happen, in the short term it is likely that some form of social distancing efforts may last until a vaccine is approved and/or the virus is otherwise eradicated. The length of the time frame for that is highly uncertain. Therefore, we anticipate the possibility of significantly heightened market volatility in the latter half of the year.
We were pleased with the results of the Waycross portfolios in the quarter and believe we are positioned well to take advantage of opportunities in both the long and short portfolios presented by an increase in market volatility.