FINANCIAL MARKET UPDATE 6.30.2020

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

QUARTER IN REVIEW

As we get ready to roll into July, it’s hard to believe we are already at the midpoint of 2020. It has been a tale of two quarters so far this year, as one of history’s most vicious selloffs stopped on a dime and transitioned into a record-setting rally. With Q2 (nearly) in the books, here is a look back at some of the major developments during the quarter.

Stocks Rallied

The stock market bottomed on March 23rd and then exploded higher, delivering the largest 50 day advance since the 1930s. Despite the stock market gains, economic data continued to deteriorate. For example, the unemployment rate didn’t peak until April, when it logged the highest reading since the Great Depression (14.7%). The market looked beyond the worsening economic data and saw good times ahead.

Up 18.7% in Q2 with just one trading day left, the S&P 500 is on pace for the best quarterly return since Q4 1998. The index briefly hit positive territory for the year on June 8th but has since pulled back.

S&P 500 Return:

  • March(1)  15.57%
  • April         12.82%
  • May           4.76%
  • June(2)       0.43%

Source: Morningstar Direct. (1) March Return calculated from the market bottom on 3/24/20. (2) June return through calculated through 6/29/20.

Economic Data Turned the Corner

The National Bureau of Economic Research (NBER) is the organization tasked with determining the peaks and troughs of the business cycle, making it the official arbiter of recessions. In early June, NBER declared a recession had begun in February 2020. The previous expansion, which began in June 2009, lasted 128 months and was the longest on record, going back to 1854!  Recessions are typically defined as two consecutive quarters of declining gross domestic product (GDP). NBER determined that the slowdown in economic activity was so pronounced that it qualified as a recession without satisfying the time-based criteria.

Recent data releases suggest economic activity may have bottomed in April. As government officials eased restrictions aimed at combating the spread of COVID-19, previously idled components of the economy have come back online. Both the unemployment rate and retail sales (among others) improved dramatically in May. While we are still far from pre-pandemic levels across economic indicators, most economists expect continued improvement in the near term.

Covid-19 Cases Resurged

A resurgence in new Covid-19 cases in parts of the country may complicate the picture. States including Texas, Arizona, California and Florida recently paused and/or rolled back plans to ease restrictions. While the market reaction to this has been muted thus far, there is the possibility this trend could jeopardize the rise in asset prices and economic activity. It is impossible to tell how all of this will play out in the coming quarter(s).

Where Do We Go From Here?

Given the uncertain path ahead of us, now is a good time to ensure portfolios are diversified and are taking on a level of risk that is appropriate. Other activities that are likely to add value include tax-loss harvesting and rebalancing. Despite the recent rally, a large portion of the market is still negative. Harvested losses can be used to offset gains elsewhere in the portfolio now or in the future. Rebalancing is particularly beneficial when markets are choppy, which appears likely following the initial recovery. Doing so constitutes buying on weakness and selling on strength (buy low, sell high).

Lutz Financial would like to wish everyone a Happy 4th of July, and we hope you have a fun and safe holiday weekend. Thanks for reading.

 

WEEK IN REVIEW

  • Economic data from May continues to show significant improvement. Last Thursday, durable goods orders (typically large items meant to last at least three years) increased by 15.8%, versus the expectation of a 10% increase. This jump in orders follows negative readings of 17% and 18% in March and April, respectively. Automakers contributed to the strong print, with a 28% increase.
  • The U.S. announced that it will be revoking the special trade relationship with Hong Kong, citing decreased autonomy from Mainland China following the approval of the National Security Law by China’s national People’s Congress. The fallout from this is not completely clear, but it does put at risk the free trade between the U.S. and Hong Kong, where there is currently a sizable trade surplus (as opposed to a large deficit with China).
  • Major reports to watch for during this holiday-shortened week include manufacturing data and the minutes from the last FOMC meeting on Wednesday, and the jobs report on Thursday.

HOT READS

Markets

  • U.S. Consumer Confidence for June Jumps More than Expected (CNBC)
  • Mainland Chinese Stocks Jump as the Country’s June Manufacturing Activity Beats Expectations (CNBC)

Investing

  • How Would Investors React If We Finally Get Some Inflation (AWOCS)
  • Markets Bombed, Investors Carried On (Zweig)

Other

  • It’s Time to Decide What to Do With Your Airline Credit Cards (WSJ)
  • How to Get a Big Break on the Cost of College: Just Ask (WSJ)
  • Why The Smartest People Make Bad Decisions Compared to Those With Average IQ (CNBC)

ECONOMIC CALENDAR

Source: MarketWatch

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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