We are approaching six months of navigating through this COVID-19 pandemic, and we hope you and your family are safe and well. Our office is open, and everyone is healthy. We are being cautious and abiding by all the protocols needed to ensure that Century Wealth Management is safe while fully operational and available to serve our clients through these difficult times.
State of the Markets
The second quarter saw a significant rebound in stock markets around the world resulting in positive performance across all major asset classes.
As of June 30, the global stock market (MSCI ACWI IMI) was up 19.8% for the quarter, but still down 7.1% YTD. The U.S. stock market (Russell 3000) performed the best and increased 22% for the quarter, bringing the YTD loss to 3.5%. International developed markets (MSCI World ex USA IMI) rose 16.2% for the quarter, resulting in YTD loss of 11.7%. Emerging markets (MSCI Emerging Markets IMI) were up 18.9% for the quarter, reducing the YTD loss to 10.1%. Publicly traded real estate (S&P Global REIT) rebounded 11.2% for the quarter but is still down 21.1% YTD. The U.S. bond market (Bloomberg Barclays U.S. Aggregate Bond Index) continued to do well as corporate credit recovered considerably, resulting in a positive return of 2.9% for the quarter and 6.1% YTD.
The total returns for major asset classes are below.
While investments are important, they are currently only one piece of a very complex puzzle. We are not experts on health or economics, but the following is a big picture perspective on both along with a deeper dive into the current investment landscape.
As hard as we all have tried to contain COVID-19, the virus continues to spread around the world. There are many sources of data that show cases, deaths, testing, recovery, hospital capacity, etc., and the data can be interpreted in ways that make the situation look pessimistic or relatively positive. The reality is that the United States and the rest of the world are dealing with an infectious virus that has a wide range of impacts on those who are infected. Some are asymptomatic and may not even realize they have COVID-19, while some require significant medical support with a high risk of death or long-term problems. Every country, every state, and every city is dealing with this in the moment. Some decisions may seem good at the time but poor in retrospect. Others may be the opposite. We will not truly know which countries, states, and cities did the best and worst in managing this pandemic until we can look back in time. This is the fog of war.
This virus will not likely go away by itself, and we are likely to see waves of high and low cases spreading across cities, states, and regions. A vaccine would be the ultimate way to mitigate this virus, and the work being put into finding a vaccine is boundless. In the meantime, managing the rate of infection and the treatment of those who are ill must be the focus. If done well, we can decrease the spread, keep the mortality rate low, and not overwhelm our medical resources. Unless the virus mutates to our advantage, it looks like we will have to buckle up and stay strong.
The virus, and our attempts to contain it, has had an unprecedented impact on our economy, but just like damage to a home, damage to the economy can be fixed. While no damage is good news, damage from externalities (think a fallen tree or COVID-19) is ultimately better than damage from internal failures (think rotted wood frames or the 2008/09 financial crisis).
That said, we cannot predict the exact path of COVID-19, and we do not know when and how the economy will come back. The recovery may be V-shaped with a fast track to normalcy, U-shaped with a longer timeline, L-shaped with an extended downturn, or W-shaped with multiple ups and downs along the way. Thankfully, the government has stepped up quickly with fiscal and monetary stimulus and seems committed to further support going forward. Based on this and recent data – including rebounds in consumer spending, decreases in jobless claims, and China’s return to positive GDP – many are hopeful that we will see a recovery with a steep trajectory.
Investments saw a significant rebound in the second quarter, and the momentum has continued in July. The rebound included stocks, corporate credit, municipal bonds, commodities and almost everything that had a significant downturn in the beginning of this crisis.
The markets signal the aggregate expectations of investors, and in March those expectations were clearly negative. Now, they are optimistic. To use the home repair analogy again, it’s as if the insurance adjuster has assessed the damage, and the cost of repair seems feasible. However, the repairs still need to be done, and we won’t know the true costs of fixing what’s broken until it’s complete. The expectations of the markets may be right or wrong, and that is to be determined.
Trends Continue Until They Don't
While the stock market in total has seen a significant comeback, under the surface some companies have performed well, and many have not.
The table below illustrates the performance and valuation of various segments of the S&P 500. The larger the company, the better the performance. The smaller the company, the worse the performance (YTD Returns column 7). This wide dispersion in returns has resulted in a wide dispersion in valuations as evidenced by various metrics in columns 3-6.
While some of this may be justified by the actual economics of businesses, the trend of expensive companies getting more expensive and cheaper companies getting cheaper cannot go on forever. This is not the first time we have seen significant gaps in valuation and performance. The chart below shows the total returns of the S&P 500 and Russell 2000 Value indices from 1996 to 2005. Large companies (S&P 500) thrived in the late 90’s, while small companies (Russell 2000 Value) did not. The mean reversion in valuations that followed, created the exact opposite results. The Russel 2000 Value Index made up for all the lost ground and then some, ultimately outperforming the S&P 500 over 10 years. Past performance is no guarantee of future results, but it is inspiring.
Different segments of the market – small, large, value, growth – sometimes move together and sometimes move in opposite directions. This is why a diversified portfolio with exposure to the entire market is important. But even with broad exposure, the underperforming segments of the market can have a significant impact on your total portfolio. Good long-term results require a good strategy, a good implementation, and the strength to stick with it even when it is not working in your favor.
Please reach out if you have any questions.