2Q20 Investment Letter

We feel investors should have an information outlet for the financial markets that is thorough, but does not require a prerequisite degree in economics. We hope this makes our commentary informative and educational for all levels of investors. We have also included a glossary at the end of this commentary that defines terms marked with an asterisk (*).

Quarter in Review

Asset Class†

2nd Quarter 2020 Return

Past 12 Months

U.S. Small Cap Stocks 25.4% -6.6%
U.S. Large Cap Stocks 20.5% 7.5%
International Stocks 16.1% -4.8%
Commodities 5.1% -17.4%
U.S. Bonds 2.9% 8.7%

Depending on the viewpoint, the past results of the market can be framed in many ways. Good news first, April was the best month for the S&P 500 since January 1987 and the 2nd quarter was the best quarter for that index since 1998. On the flip side, the first half of 2020 was the worst first half-year for the S&P 500 in a decade, a reminder of the carnage faced in the first quarter. Conversely, bond market returns are on a meteoric pace. With bond yields continuing on a lower trajectory, the prices of bonds have rocketed higher–extending a sharp rise in bond prices that started in late 2018. While it has been a great time to be securing debt (think mortgage refinances), it perhaps is not the best time to be a bond investor. At some point, bond prices will succumb to a fall. 

With amusement parks closed nationwide, Americans had to get their excitement elsewhere during the 2nd quarter. The stock market seems to have filled the entertainment void for many, with record numbers of new brokerage accounts opened and wild daily swings during the quarter.  Continuing a trend that started in the first quarter, new accounts at the major online brokers rose significantly, with Charles Schwab reporting over 3 times the amount of new account openings in the 2nd quarter of 2020 versus the same period in 2019. With increased volatility, daily changes to stock market averages provided an emotional roller coaster not unlike Six Flag’s most daring offering.

A New Normal or Something Different?

COVID-19 has upended all market forecasts made at the start of the year. Below is a list of some of the most important factors currently in play and how these factors could affect the future path of the economy.

Variable

What’s Happened

How it Affects the Future

Unemployment Rate Going into the pandemic, the unemployment rate was at record low levels. In April, it shot up to 14.7%, the highest in decades.  As businesses re-open, the number of unemployed should decrease, but the rate of the rebound is in question. This is especially important as unemployment benefits expire for most Americans in the next 3-6 months.  
Inflation Inflation was hovering around 2% for several years, but has been muted in the past 2 months to near 0% A low inflation rate will enable the Fed to keep interest rates low without the worry of skyrocketing prices. 
Interest Rates The benchmark 10-Year U.S. Treasury Note has hit the lowest level in history, falling to under 1%. Continually lower interest rates will encourage spending at both the personal and corporate level.
Vaccine Timeline Several COVID vaccines are in the pipeline seeking approval. Over 100 vaccines are being tested and 5-10 are currently in phase 2 or awaiting FDA approval. The typical timeline for a vaccine from development to distribution is around a decade. The speed at which a vaccine can be implemented is crucial to medium-to-long term economic forecasts.
Presidential Election National polling indicated a tight race in early 2020, but since the pandemic, Biden has taken a near 10% lead.  Trump had continually been viewed as the economically friendly option, but markets seem to be getting more comfortable with a Biden victory despite pledges for higher tax rates. 
Consumer Spending Consumer spending fell off of a cliff in April, with the biggest one-month percentage decline on record. It rebounded in May, but numbers are still well below pre-COVID rates.  With many businesses closed, especially those in services and leisure, it is unclear how spending can fully rebound without a vaccine. 
Fiscal Stimulus  Several rounds of swift fiscal stimulus packages to both individuals and businesses saved the economy from catastrophe during the second quarter. Talks continue about the need for more stimulus efforts in the coming months.  In the near-term, fiscal stimulus is the most effective weapon in the government’s arsenal to fill the void of income and spending. Longer-term effects of increased deficit spending are troublesome. 

These factors, among others, will play a role in shaping an economic path forward. With data changing daily, it is a challenge to forecast the near future. However, the recent months have given more clarity to the best and worst cases that could occur.  

Worst-Case Scenario:

The worst-case scenario centers around a delayed vaccine timeline. Should several of the leading vaccine candidates be deemed ineffective in the coming months, the clouds will move back over the economy. This would be compounded if new cases and deaths rise significantly in the fall months resulting in the majority of the U.S. once again being restricted to stay-at-home orders. Should a vaccine be viewed as further away than currently expected, factors such as unemployment, consumer spending, and fiscal stimulus demand will stress the capabilities of a functioning economy. Continuing high unemployment will require the government to issue trillions more in financial stimulus and also limit advances in consumer spending. Another negative for the economy would be a poorly functioning election where issues with mail-in ballots or foreign interference create confusion over the results.

Best-Case Scenario:

A truly bullish scenario for near-term economic success would need to involve an effective vaccine by early 2021. That scenario would enable most activities to resume in full by the second quarter of 2021 and would make COVID more of a short-term issue. Short of an effective vaccine in less than a year, successful business and school re-openings without significant setbacks, especially as we enter the colder fall season would be welcomed news. If the number of new cases decline in the current hot spots and the feared fall resurgence fizzles, consumer discretionary spending would immediately improve the outlook for employment and corporate results.

The actual path forward will likely borrow from both cases, with a large amount of the future outcome dependent on the vaccine timeline. It is also possible that the path of the stock market and economy will diverge from the path of the virus, as we witnessed at the end of the second quarter. Regional differences in virus preparedness/reaction along with widening divisions in the social fabric of our country further cloud the picture of what is ahead.

 

 

† Indices used to represent asset classes:
U.S. Large Cap Stocks – S&P 500
U.S. Small Cap Stocks – Russell 2000
International Stocks – MSCI ACWI ex-U.S.
U.S. Bonds – Bloomberg Barclays Aggregate
Commodities – Bloomberg Commodity

IMPORTANT INFORMATION

The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes and represents Wilson Capital’s views based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Wilson Capital is a Registered Investment Advisor (“RIA”), registered in the state of Massachusetts. Wilson Capital provides asset management and related services for clients nationally. Wilson Capital will file and maintain all applicable licenses as required by the state securities boards and/or the Securities and Exchange Commission (“SEC”), as applicable. Wilson Capital renders individualized responses to persons in a particular state only after complying with the state’s regulatory requirements, or pursuant to an applicable state exemption or exclusion.

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