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Second Quarter Key Takeaways | 2020

For most of the second quarter, financial markets seemed to defy grim economic news, the continued spread of COVID-19, and worldwide protests against racial inequality. Global equities performed strongly for the quarter and rewarded investors who remained invested. The S&P 500 Index gained 21% and, as of June 30, is now down only 3% for the year, despite the huge drawdown in March. From the March 23 low, the U.S. equity market soared 40%, recording its best return ever over any 50-day period. Developed international and emerging-market (EM) stocks gained 17% and 19%, respectively, and outperformed U.S. stocks in late May and June.

Central banks around the world provided unprecedented support to markets and economies. On the fiscal side in the United States, trillions in direct payments and loans have been or are going to be delivered to impacted citizens and businesses. The level of stimulus globally has easily surpassed what was issued during the 2008 financial crisis.

Short-term interest rates are now near zero or negative in most of the developed world. The 10-year Treasury yield fell slightly this quarter but has revolved around 0.7% for some time. Investment-grade corporate bonds gained 3% as yield spreads narrowed.

While markets have rebounded, we should not entirely rule out a potential double-dip back down to the late-March market lows, most likely caused by disappointing developments on the virus/medical front. There are also other uncertainties around the November election or the ongoing U.S.-China dispute that could disrupt financial markets.

Market Recap

In the second quarter, larger-cap U.S. stocks gained 21% and smaller-cap stocks climbed 25%. Despite the medical, economic, and social turmoil all around, the U.S. market is down just 3% year to date (as of June 30) and only 8% below its all-time high on February 19.

However, there is a distinct style (or factor) bifurcation beneath the surface: The Russell 1000 Growth Index is up 10% on the year, while its Value sibling is down 16%. That is a stunning 26-percentage-point difference. Or, from another angle, the S&P 500 technology sector is up 12% on the year, while the financials, industrials, and energy sectors are down 24%, 14%, and 35%, respectively.

Looking overseas, developed international stocks rose 17% and EM stocks gained 19% in the second quarter. For the year, they are down 11% and 10%, respectively. As in the United States, growth indexes are meaningfully outperforming value indexes overseas. The U.S. dollar depreciated slightly during the quarter, providing a modest tailwind to foreign market returns for dollar-based (unhedged) investors such as ourselves.

Finally, in the fixed-income markets, core bonds gained almost 3% for the quarter, as Treasury yields dropped slightly (falling bond yields imply rising bond prices) and investment-grade corporate bond spreads narrowed, rallying along with the equity markets.

-OJM Investment Team