In this latest installment of our quarterly newsletter, we share our observations on the second quarter of 2020 and our outlook for the remainder of the year. Click here to go to the full report on our website. The following are a few highlights:
- The stock market’s second quarter performance marked its best quarter since 1998, after a sharp fall in the first quarter. The S&P 500 index rose 20.5% on aggressive actions by the U. S. Federal Reserve and Congress and signs of an economic rebound, most notably the robust rehiring of workers in May and June.
- Stocks’ recovery from their March lows was remarkable for its speed and magnitude. Having plunged 34% from its high in February to its low point on March 23rd, the S&P 500 index gained almost 39% through the end of June, with over half of that increase coming in the second quarter.
- The sectors with the best performance during the quarter included consumer cyclical, energy, and technology, each up more than 30%. The S&P 500 index ended June down only 3.1% for the first six months, a performance we consider impressive given the severity of the challenges.
- Reports during the quarter confirmed that U.S. gross domestic product (GDP) declined during the first quarter at a 5% annual rate, and expectations are for an even more severe decline in GDP in the second quarter despite the employment gains.
- Corporate earnings declined 15% during the first quarter, hurt by the pandemic-related shutdowns in March. Current estimates project an earnings decline of 45% for S&P 500 companies in the second quarter, when the shutdowns affected the entire period.
- Powerful support from the U.S. Fed and foreign central banks, combined with government fiscal support in the United States and abroad, was critical to the global economy’s ability to dampen the economic blow from the pandemic.
- We are pleased to see the stock market’s resilience in the face of the significant challenges presented by the pandemic. However, we have concerns about the market’s prospects for the coming quarters and are being cautious with our portfolios.
- The United States clearly is having difficulty controlling the spread of COVID-19, and we are concerned that our economic recovery will take longer, and securities will remain volatile, as a result. Much uncertainty remains regarding the economic outlook, including the reopening of schools over the next few months that is a prerequisite for many workers to return to their jobs.
- Also unknown is whether our political leaders will provide another round of relief to workers and households still hurt by loss of jobs and closure of much of our economy. We are hopeful that further relief will be forthcoming and are confident the Fed will do what it can to help, but we are wary of the political squabbles ahead as Congress and the White House work out the details of any additional relief measures.
- We continue to believe the best course of action for investors is to stick with our long-term investment strategy, which focuses on shares of high-quality companies with durable business models and sustainable competitive advantages that will survive this temporary threat.
- As noted in earlier reports, we have sold certain holdings that we believed were most directly exposed to the impact of the pandemic and built up cash reserves in the process. While we intend to generally hold current cash levels until we get more certainty regarding the pandemic and economy, we expect to take advantage of opportunities to purchase individual securities that become available at attractive prices, particularly if the market drops again over the coming months. For the income portion of our portfolios, we are also being cautious and currently favor less volatile securities such as bonds and preferred stocks.
- We know recent conditions have been stressful on many fronts, and we appreciate your ongoing patience and confidence in our investment approach and stewardship of your assets. While we do not know how long this economic disruption will last, we are confident that the economy and markets will bounce back once conditions improve, as has happened after every other downturn. We remain optimistic that the United States will get through these tough times and that our clients’ portfolios will perform well over the long term.
The Edgemoor Team
