CWG Market Commentary: What a ride in the 1st half of 2020! What is the next stop?

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2020 is a year for the record books!

After an abrupt end to the 2009-2020 bull market on February 9, 2020 stocks dropped 35% in one month on the fear of COVID-19. In this past quarter we saw a 20% rally in the S&P 500 index. We finished June up 41% off the March 23 low. Q3 starts off -8.6% from the market top of 3393.52, yet -3% YTD at 3100.29 on June 30, 2020.

The best market performers were found in the Russell 1000 Growth index; IWF +9.7% YTD. Some of the worst performance came in the Russell 1000 Value index, IWD -16.29% YTD.  The broader ishares Russell 2000 index, IWM finished -12.99% YTD with IJR the small cap index -17.85% YTD.

The economy crashed on lockdowns. Unemployment soared to 40 million plus, as the COVID-19 virus visited our shores while going global.

Global stocks as measured by the IEFA index are -11.53% YTD.

Q2 earnings, which are now starting to flow, will surprise in both directions.

Needless to say, people have become confused while trying to regain their balance. Why do stocks rise when the economy goes down, the virus spreads, plus most news is dreadful? 

  • The simple answer is that markets are forward looking.

    • As for spots to invest "safe money" we note that many dividend and municipal or mortgage funds have paltry or negative returns in 2020. 

    AGG, the ishares Core Aggregate Bond ETF, with 74%. U.S. Treasuries returned +6%. HYG, the high yield corporate bond ETF, closed June -5.36%. MUB is +1.3%.

    The pressing question on most investors' minds: Where on earth do we go from here, do we set up for a summer of fun or more lockdowns and riots?”

    We have a tale of two markets;

  • The Nasdaq Composite is leading with strong gains as people work and shop from home using technology platforms provided by Amazon, Apple, Facebook, Google, Microsoft and Netflix.
  • DocuSign, Teladoc and Zoom are the new names that have soared along with cloud companies that store for and facilitate commerce.
  • Tesla has vindicated its faithful, as Elon Musk has met his goals despite many concerns, obstacles and short sellers. TSLA went from a March 18, 2020 low of $360 to a new all-time high of $1228 today.
  • All this is happening while banks, airlines, leisure, energy, bricks and mortar retailers, and REITs languish. J.P. Morgan is down 33%, Simon Property Group -52,9%, American Airlines -55%, Macy's -61.7%, GM -32.4%, XOM -37.4% are examples of the year-to-date have nots.

    • Economic numbers are starting to show improvement from levels of recession not seen in decades.

    FactSet predicts SPX earnings will drop 22% this year and bounce back next year.

    Lack of visibility causes wide market swings as measured by VIX, a CBOE volatility index. VIX began the year around 12, soared to 85 on March 18 and is now trading at 27. High numbers equal high volatility and dangerous market movements.

    According to FactSet 54% of companies WILL NOT issue forward guidance for the coming quarters.

    The market appears to be looking for a cure or a vaccine as the best-case scenario. As the economy opens there is both joy and disappointment.

  • Private businesses are struggling mightily. Many have little financial wherewithal to wait out the virus despite massive Government aid.
  • Adding insult to injury, many city centers have been looted or burnt out of existence in the wake of justice protests.
  • We are witnessing a culture war divide our nation, the likes of which have not been seen since the late 1960's.
  • Conflicts within the country and with new adversaries, like China, are causing changes in the way we work, play and think about our future.

    • School openings loom in the Fall. November elections are 5 months away. Another rescue package by the Government is expected by July 21.

    Social unrest will likely continue up to and possibly beyond the Presidential election.

    People appear unwilling to put up with longer lockdowns. Mask wearing is optional in most areas and controversial. Social distancing is declining. These trends have caused Covid-19 to spread more than many anticipated as summer begins. Heat in the air is not a cure.

    Despite bleak economic numbers, the DJIA rose 18% this past quarter, the best gain since 1987. That index finished June -9.6%.

    It is frankly impossible to predict the next turn of the virus or what the election will bring in November.

  • A Democratic sweep will result in higher personal and corporate taxes soon thereafter.
  • A split result, which markets generally prefer, is likely to help further this rally.

    • A case can be made for a slow recovery and increasing inflation in years to come. A "V" shaped recovery in the market is not necessarily a "V" in the economy.

    Some things are positive as markets climb a proverbial "Wall of Worry": 

  • Stocks yield more than 10-year U.S. government bonds. SPY pays a 1.76% dividend. 
  • DJIA pays a 3.50% dividend, however some components are likely to cut payouts.
  • The U.S. 10-year note pays only 0.68%.
  • One-year T Bills pay 0.15%.
  • Europe and Japan still have negative yields, in many maturities.
  • Earnings estimates for 2021 will improve, but to what level is highly uncertain.
  • The Fed has the markets back and this economy can only improve.
  • If volatility goes lower and stays there, better prices will follow.

    • My concerns for the market include:

  • Valuations are high, fiscal deficits are climbing and higher taxes loom in 2021.
  • Q3 often results in minimal market gains.
  • If we see more lockdowns and social unrest, prices could easily retreat 10%.

    • Time will tell how events unfold.

    If you need to chat about anything on your mind, please reach out. Invest for the long term, it’ll be here before you know it!

    Have a safe summer.

    We wish you a Happy 4th of July and God bless America!

    Doug Coppola 

    Executive Director & Investment Committee Chairman


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