The “new normal” continues: Market reflections for second quarter 2020

The second quarter of 2020 saw the continuation of a “new normal” as COVID-19 disrupted everyday routines and altered scheduled plans.

Markets rebounded strongly from the sharp downturn in the first quarter.

After experiencing a 2020 low of nearly -32% on March 23, the MSCI All Country World Index climbed almost 11% in April and finished the quarter up about 20%.1 The S&P 500 Index also finished the quarter with the best performance since 1987.2 The significant fiscal and monetary policy response from governments and central banks, in addition to the reopening of economies from lockdown, led to an increase in market optimism.

After finishing down over 60% in the first quarter, oil prices also rebounded. Reopening economies increased oil demand, and oil producers reduced supply by cutting back production. Oil prices increased 92% in the second quarter, marking the largest percentage gain in a quarter in 30 years.3

Macro-economic data has remained troubling and unpredictable, with the June jobs report showing the addition of 4.8 million new jobs but an unemployment rate of 11.1%.4 One might question how markets can be performing so well when economic data has not shown the same level of improvement. As we discussed in our most recent webinar, market movement tends to lead economic data, which can consist of lagging indicators.

The U.S. and China geopolitical and trade tensions have also continued throughout the quarter. The most recent tensions have revolved around China’s handling of the COVID-19 outbreak, as well as a new national security law established by China granting Beijing more control in Hong Kong affairs.5  The U.S. has responded by revoking Hong Kong’s special status, citing the territory’s autonomy being compromised by the new national security law. Despite these latest frictions — which will likely continue but may take a backseat to the approaching U.S. presidential election — both sides have expressed desire to work together in order to implement the phase 1 trade deal that was signed in January of this year.

Despite the various events of the quarter and continued uncertainty that investors face, we remind you that maintaining a long-term perspective has historically been rewarded.

Second quarter returns

Second quarter returns 2020Returns shown in the chart above are for second quarter 2020.
Source: Morningstar®, data as of June 30, 2020. See disclosure page for more information.

Stock performance across the globe

U.S. large-cap stocks, represented by the S&P 500, advanced 20.5% in the second quarter. Within the large-cap segment, growth stocks (Russell 1000 Growth Index, 27.8%) outperformed value stocks (Russell 1000 Value Index, 14.3%) for the quarter.

Small-cap stocks, represented by the Russell 2000 Index, were up 25.4%, outperforming U.S. large-cap stocks for the quarter. Within small caps, value stocks (Russell 2000 Value, 18.9%) also lagged growth stocks (Russell 2000 Growth Index, 30.6%) during the second quarter.

On the international front, the MSCI EAFE Index advanced 12.6% in local currency terms and finished up 14.9% in USD terms. A slight decline in the U.S. dollar relative to other currencies buoyed returns for U.S. investors in overseas markets.

Emerging markets stocks, represented by the MSCI Emerging Market Index, were up 16.7% in local currency terms and 18.1% in USD terms.

While the structural tilt towards value stocks detracted from portfolio performance this quarter, small-cap stocks aided performance by outperforming large-cap stocks. As we pointed out during our last quarterly update, small-cap stocks and value stocks can experience strong relative performance coming out of recessions, as was the case in 2009 following the 2008 financial crisis.

World asset classes

Returns for the second quarter and year to date (YTD) 2020

World asset classes 2020

Source: Morningstar®, data as of June 30, 2020. See disclosure for more information.

Bond performance across the globe

The bond market exhibited positive performance during the risk-on environment in the second quarter. The liquidity challenges, even for high-quality corporate bonds, faced during the first quarter largely abated due to aggressive guidance and support by the Federal Reserve. Even though the Federal Reserve is in the very early innings of implementing the lending facilities and purchase programs that we discussed during last quarter’s update, the verbal guidance and intentions from the Fed helped ease investor fears about illiquidity in the bond market. Overall, as credit spreads narrowed considerably in the second quarter, the lower quality segments of the bond market outperformed the higher quality segments.

The 10-year nominal treasury bond yield fell 0.04% to end the quarter at 0.66%. As the Federal Reserve has signaled that the federal funds rate will remain near the zero-lower bound for an extended period, yields at the short end of the U.S. yield curve remained at low levels during the quarter. Yields inched upward toward the longer end of the curve as the 30-year nominal treasury bond yield increased 0.06% during the quarter to finish at 1.41%. Therefore, the U.S. yield curve modestly continued its steepening trend during the second quarter as growth prospects for the economy improved.

The Bloomberg Barclays Aggregate Index, representing investment-grade U.S. bonds, posted positive returns and gained 2.9% for the second quarter. Municipal bonds, represented by the BBgBarc Municipal 1–10Y Index, advanced 2.7% during the quarter.

Emerging market debt prices increased, and rising commodity prices provided a tailwind, as many emerging market economies are heavily dependent on the production of various commodities. The JPM EMBI Global Diversified TR Index, representing bonds denominated in U.S. dollars issued by emerging-market governments, returned 12.3% for the quarter. High-yield bonds (represented by ICE BofAML BB-B US CP HY Index) also posted gains and finished up 9.4% as credit spreads narrowed.

Where do we go from here?

Although it is difficult for investors not to react in the face of unsettling circumstances, markets rewarded investors who maintained discipline and focused on their long-term goals this past quarter.

The path forward to recovery is certainly not clear or well defined, especially with the risk that COVID-19 continues to present in the form of recent outbreaks in select “hot spots” across the nation and world, as well as the chance of a broader “second wave” this fall. In addition, the timeline remains unclear as to when an effective treatment or vaccine may be readily available. The path forward for the economy will very likely be linked with the path of these developments and the virus. Therefore, market volatility has remained at elevated levels, and we can expect to continue to see larger daily market moves.

With that said, we have seen encouraging signs of recovery in the form of recent economic data, such as decreasing initial jobless claims and the latest unemployment report here in the U.S. The Federal Reserve has not been bashful in signaling its support for the economy. As the old mantra goes, “Don’t fight the Fed.”

While important to stay informed, it can be easy to let various media outlets seemingly amplify the uncertainty and make it more difficult to stick to your plan. With all the uncertainty experienced in March, an undisciplined investor may easily have been spooked out of the market only to miss out on the strong rebound experienced this quarter.

At Wipfli Financial Advisors, we are here to help you make disciplined financial and investment decisions that align with your risk tolerance and focus on achieving your long-term goals. As always, and as evidence has shown, focusing on what you can control and maintaining a diversified investment approach is your ally through market turmoil.

U.S. Stock Market: Russell 3000 Index
International Developed Stocks: MSCI EAFE NR Index
Emerging Markets Stocks: MSCI EM NR Index
U.S. Bond Market: Bloomberg Barclays Aggregate Index
Emerging Markets Bonds: JPM EMBI Global Diversified TR Index
Large Cap U.S. Stocks: S&P 500 Index
Small Cap U.S. Stocks: Russell 2000 Index
Int-Term Municipal Bonds: BBgBarc Municipal 1-10Y Blend 1-12Y Index
High Yield U.S. Bonds: ICE BofA BB-B US CP HY Constnd Index

Return data represent past performance and are not indicative of future results. Historical returns of indices do not reflect applicable transaction, management or other applicable fees, the incurrence of which would decrease historical performance results. Index information has been compiled by Wipfli Financial from sources Wipfli Financial deems reliable, but has not been independently verified. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only. Indices are unmanaged. It is not possible to invest directly into an index. Any charts and graphs represented herein are for informational purposes only and cannot in and of themselves be used to determine which securities to purchase or sell, or when to purchase or sell securities.

Source: © [2019] Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

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Wipfli Financial Advisors Investment Committee
Wipfli Financial Advisors Investment Committee

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The “new normal” continues: Market reflections for second quarter 2020

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