Second Quarter 2020 Commentary

As 2020 continues to prove, life is anything but certain. The only thing you can control is how you react or adapt to that uncertainty. Mid conversation with my 6-year-old Bradford, I realized just how quickly we can adapt. In March when this all began; Martha and I had been boxing with a trainer and Bradford was intrigued by it. Roy, our trainer had a background in boxing and Bradford really wanted a chance to meet with him and learn on his own. Covid-19 came along, and I had to explain to Bradford that was no longer an option. He looked at me like I had three heads and said, “I know that. I was talking about having a Zoom meeting.” Just as Bradford has adapted, we have all adapted to the current environment of uncertainty. Speaking of uncertainty…

During the first half of 2020, investors experienced a global pandemic, an economic shutdown, the end of an eleven-year bull market, and now the early stages of an economic recovery. The U.S. stock market has experienced large swings in both directions, rising 20% in the second quarter after falling 20% in the first. Interest rates have remained low, especially with the Fed continuing to provide stimulus. With all that has happened in such a short amount of time, it's important to reflect on what we have learned and what may lie ahead.

The irony is that as we begin the second half, the S&P 500 is only a few percentage points from where it started the year. While this recovery happened unusually swiftly, and we're certainly not out of the woods yet, it is further evidence that staying invested and maintaining a long-term focus are key to achieving financial goals.

Staying disciplined is easier said than done. As recently as March, it was unclear whether COVID-19 could be adequately contained. As the country was shut down, it was uncertain whether individuals and businesses would survive without paychecks and customer activity. As corporate bonds declined, there was a fear that bankruptcies and defaults would ripple across the financial system, leading to a 2008-style crisis. Finally, it was unclear when and how the economy could reopen, and if it did, whether consumers and businesses would feel confident enough to spend.

Fortunately, we've learned a great deal since then. While we are still in the earliest stages with many more negative data points to come, there are clear signs that bouncing back is possible. Jobless claims and unemployment are still near historic levels but have begun to come down steadily. Consumer spending has picked up as cities have reopened, although overall confidence is still low. Industrial activity has thawed as factories fire up again across the country. Credit markets have stabilized despite some large restructurings. Many parts of the stock market have fully recovered.

None of this is to say that the economic recovery will be easy. This is especially true in parts of the country that have seen a resurgence of COVID-19 cases and in industries that are deeply impacted by social distancing including restaurants, travel, retail and more. And while there are signs that customers are returning to these establishments, limited capacity will mean that the jobs that have been lost are increasingly at risk of becoming permanent.

Despite this, there have been companies that have not only survived the crisis but have thrived. This is especially the case with technology companies across sectors. Not only has telecommuting and video conferencing become the norm for office workers, but the shift to online retail has accelerated. This is one reason that some sectors of the stock market have not only recovered from pre-crisis levels, but have achieved new highs.

Investors should set proper expectations about the recovery going forward. Many economic forecasts, including by the Fed, expect a strong rebound in the second half of the year, but not enough to stem negative growth for 2020 overall. In fact, most economists and business leaders expect conditions to be uncertain until the end of 2021, at the earliest. While this partly depends on public health developments, including the possibility of a vaccine or other treatments, it also speaks to the severity of the economic crisis.

Therefore, long-term investors should continue to be disciplined and patient. Holding a diversified portfolio has not only been the best way to weather this particular storm but has been the way to do so across history. With so much uncertainty in the world during the second half of the year amid the pandemic, presidential election, trade disputes, and other factors, staying balanced is still the best way to achieve financial goals.

Below are five key insights and trends to follow for the second half of the year as well as key economic numbers with their forecasts.

COVID-19 continues to create economic uncertainty

When it comes down to it, the crisis is rooted in public health. Although many early hot spots for COVID-19 have managed to control the pandemic, other states are now seeing an acceleration in new confirmed cases. Financial markets have been volatile as these patterns call into question the ability for the economy to reopen smoothly.

The Fed and Congress will keep stimulating the economy

Although government support is a controversial topic for many, actions by the Federal Reserve and emergency legislation by Congress arguably helped keep businesses and individuals on life support. Fed stimulus, in particular, helped to keep the financial system functioning smoothly, especially during the period when credit markets were unstable. It's unclear what long-term consequences this historic level of government stimulus will bring. The Fed has projected that it will keep interest rates at zero percent through 2022. Only time will tell if they will shift their policy stance once the economy successfully comes out the other side.

There are early signs of an economic recovery

Although the economic data is still generally negative - which will also be the case for Q2 GDP when it is released - there are some positive signs. New data points have shown that unemployment is stabilizing and that consumers are beginning to open their wallets again. While it will take time to reach pre-crisis levels of growth, these are positive signs that a recovery is potentially on the horizon.

Unemployment is beginning to stabilize

The job market has shown very early signs of stabilizing after a drop to record levels. Not only did the unemployment rate skyrocket to levels not seen since the Great Depression but weekly jobless claims show that nearly 20 million Americans are still out of work. The good news is that more recent data suggest that furloughed employees are being recalled and unemployment is slowly improving.

Consumer spending has picked up as well

One of the key considerations for the recovery is whether consumers will feel financially secure and comfortable enough to spend. After all, the national savings rate jumped to 33% while the country was on lockdown. Fortunately, there are initial signs that consumers are feeling more confident. Retail sales have bounced from their recent lows, especially for online digital retailers. This will be important as the recovery continues since consumer spending is the foundation of the economy.