Each quarter, Aldrich Wealth Partner Nicole Rice and Chief Investment Office Darin Richards provide market commentary and make projections for the upcoming quarter. This conversation is accompanied by a deeper dive into market performance and outlook, as well as featured articles on popular topics such as retirement planning and changes in interest rates.

The world remains in the throes of a global pandemic, with the United States as its current epicenter. Despite a rather gloomy backdrop, U.S. equities recorded their best quarter of returns in decades. This result came on the heels of the correction in the first quarter that saw stocks tumble and brought an end to the longest-running bull market in U.S. history. The S&P 500 index is only modestly negative for the year after falling nearly 20% in the first quarter. Earnings guidance has been broadly suspended and traders are looking to unconventional metrics to track the trajectory of the economy and financial markets. International stocks also performed well though not to the same extent as domestic stocks. U.S. GDP declined by 32.9% in the second quarter, a record fall. The shape of the eventual recovery is still up for debate. In light of the unknowns surrounding the coronavirus and earnings, we expect heightened volatility until clarity improves. 

The S&P 500 index returned 20.5% over the second quarter of 2020, the best three-month showing for the large-cap index since the final quarter of 1998. The rapid rally follows a precipitous first-quarter drop, which saw the S&P 500 index fall nearly 35% from all-time highs set in February. On the year, the large-cap index is down 3.1%. 

All eleven underlying sectors of the S&P 500 index increased over the quarter. Consumer discretionary and Information Technology stocks extended their run of outperformance. These sectors are in decidedly positive territory through the first two quarters, having respectively returned 7.2% and 15.0%.  Interestingly, Energy was also among the top-performing sectors for the quarter. That said, Energy more than halved in value over the first quarter and is still the worst-performing sector for 2020, down 35.3%. The defensive Utilities and Consumer Staples sectors trailed the pack for the quarter. 

Growth stocks continued to outpace value stocks. Investors are preferring less cyclical stocks in favor of those that are perceived to generate revenues without strong economic growth. In a reversal of trend, small-cap stocks bested large-cap stocks. The positive showing by small-cap stocks was to some extent a snap–back from a very poor performance in the first quarter.  

Although investors have largely cheered stocks’ recovery in the second quarter, it is worth noting that the rate of returns slowed noticeably over the course of the quarter. After rising 12.8% in April, the S&P 500 index added 4.8% in May and 2.0% in June. Given the uncertainty surrounding COVID-19, more than 40% of companies within the S&P 500 index have suspended earnings guidance for the year. In response, traders have taken to tracking unconventional metrics to glean insights regarding the economy and direction of the financial markets. Non-traditional data on restaurant reservations, retail-store traffic, searches for directions, and travel through airports is now closely tracked by Wall Street. 

International stocks experienced a similarly impressive recovery throughout the second quarter, but ultimately lagged their domestic counterparts. The MSCI EAFE index, measuring the performance of developed-country stocks, rose 14.9%. Australia, the top-performing country within the EAFE index in the quarter, has largely escaped the COVID-19 crisis with 8,000 confirmed coronavirus cases and just 104 deaths to date. Meanwhile, the MSCI Emerging Markets index increased 18.1%. Returns by member countries were largely related to a snapback in sentiment, with first quarter’s laggards’ posting the highest returns.  

The Bloomberg Barclays U.S. Aggregate Bond index returned 3.7% during the quarter, while the broader Bloomberg Barclays U.S. Universal index returned 3.8%. After a first quarter characterized by a flight-to-safety, fixed-income trading witnessed a pivot toward higher yielding bonds. High-yield bonds and investment-grade credit, for example, rose 9.1% and 8.2%, respectively. Emerging market bonds participated as well, increasing 9.1%. The yield on the 10-year U.S. Treasury ticked up just 0.04% over the second quarter, finishing at 0.66%. 

The spread of the coronavirus and subsequent lockdowns designed to curb its spread have wreaked havoc on the U.S. economy. Gross domestic product (GDP) declined by 5.0% over the first quarter of 2020. Technically speaking, an economic recession is defined as two consecutive quarters of negative economic growth. Although anticipated, the U.S. economy recorded the biggest quarterly plunge in activity ever for the three months ending June 30. Gross domestic product (GDP) plunged 32.9% on an annualized basis, according to the Commerce Department’s first reading on the data released on July 30. The onset of the recession marked an end to what had been a 128-month economic expansion, the longest running expansion in U.S. history. After sitting at a modest 4.4% in March, the unemployment rate ballooned to 14.7% in April, the highest rate in recorded history. The rate has gradually fallen since the April peak, hitting 11.1% in June. 

Whether the eventual recovery from the current recession will resemble a sharp V-shape or protracted U-shape remains up for debate. For now, the Fed predicts GDP to decline 6.5% over 2020. That said, the Fed remains more optimistic regarding the longer-term health of the economy, forecasting a rise in GDP of 5.0% for 2021. 

The ongoing coronavirus crisis has been an extremely distressing period. At last count, there were 10.9 million confirmed cases of COVID-19, with one quarter of these cases isolated to the U.S. Despite the uncertainty surrounding the trajectory of the pandemic and reopening of the economy, the forward-looking stock market seems to see light at the end of what may occasionally feel like a very long tunnel. The second quarter was the best three-month stretch for the S&P 500 index since 1998. Arguably, the primary driver of the recovery was the substantial stimulus response and the belief that additional stimulus measures will follow if needed.  

Despite the strong recovery by the financial markets in the second quarter, mixed signals persist. The unemployment rate is trending downward and economic growth is generally predicted for recovery solidly in 2021. At the same time, forecasts for company earnings are extremely difficult to make. The World Health Organization reports that there are currently over 140 COVID-19 vaccines in trial, and a handful of these vaccines have shown promise to prevent and treat the disease. Ultimately, when or if a cure exists remains unknown. In our last quarterly commentary, we expected stocks to recover before the economy. As the last three months have shown, this prediction has proven true. We also noted that we expect continued volatility in the markets until the spread of COVID-19 is contained. We believe we will see above-average volatility in the markets and economic data going forward and investors should prepare for periods of sharp swings in both directions. After a tremendous recovery in the second quarter it seems unlikely that we will experience additional robust returns until substantial progress is made toward treatment or vaccines.