2020 Q2 in Review and Looking Ahead
Global Economies and Market Review
If the first quarter of 2020 surprised investors with a global health pandemic and severe market downturn, the second quarter brought an equally historic shift toward optimism. The broad market selloff that began in February continued until late March, followed by the S&P 500 Index, a barometer for large U.S. companies, bottomed out and then proceeded to recover a large portion of its losses over the next few weeks. However, despite both domestic and international markets posting double-digit returns in the second quarter, year-to-date returns across many market segments remain negative – some in the double-digits. One exception is the large-cap growth area of the market, as measured by the Russell 1000 Growth Index, which is positive on the year due to its heavy weight to technology stocks.
Some of the quarter’s positive market movement could be attributed to investors looking favorably on both the fiscal and monetary policy response to the coronavirus pandemic. Through various legislation, the government has provided $2.4 trillion in stimulus for citizens and businesses, equal to just under 12% of total U.S. economic output. The Federal Reserve likewise announced $8 trillion of monetary stimulus by dropping interest rates to zero, restarting its quantitative easing program, and announcing its intention to purchase corporate bonds, municipal bonds, and asset-backed securities to support the economy.
Bond markets continued to show stress in the quarter. However, investors were rewarded for owning quality fixed-income holdings. Bonds are routinely rated for stability, and the second quarter saw an unusually high number of rating downgrades, implying a lack of stability in many debt issuers. The number of U.S. corporate credit upgrades in the quarter totaled only 60 compared to 994 downgrades over the same time period. However, it is important to note that more than half of the quarter’s downgrades were in the high yield (or riskier) segment of the bond market. In other areas of fixed income, the 10-year U.S. Treasury yield is at historic lows. After rising in late May when there was optimism of the U.S. economy reopening, yields have since fallen as reopening efforts have seen mixed success at both strengthening the economy and keeping the pandemic under control.
We are beginning to see the early impact of the national shutdown in economic data. As a result, the Federal Reserve’s monetary policy stance is firmly accommodative. We can expect the Fed to do “whatever it takes” to support and stimulate the U.S. economy. Future fiscal policy responses from Congress are less clear. Election year politics make next steps for both stimulus policy and economic developments uncertain. In addition, the threat of a “second wave” of coronavirus still looms until researchers can develop and distribute a vaccine. As a result, we expect market volatility to persist throughout the remainder of 2020.
What Does This Mean For You?
Domani Wealth continues to maintain a long-term approach to wealth management. The extreme volatility seen during the first and second quarters of 2020 are just one example of why we emphasize a long-term perspective. Investors who maintained calm through early 2020 were generally rewarded for their patience as the quarter progressed. We continue to apply a disciplined process that includes an asset allocation closely aligned with your financial goals.
We view the current environment as an opportunity to revisit your strategic portfolio allocation, take another look at your cash needs, make portfolio shifts to minimize tax liability, and review your long-term goals. If you have any questions or would like to meet and review your financial situation, please call our office for a virtual appointment.
Data sources: Bloomberg
Important Disclosure Information
Domani Wealth, LLC (“Domani”) is an SEC-registered investment adviser with its principal place of business in Lancaster, Pennsylvania. Domani may only transact business in those states in which it is notice-filed, or qualifies for an exemption or exclusion from notice-filing requirements. This communication is limited to the dissemination of general information pertaining to its advisory services. Accordingly, this communication should not be construed by any consumer and/or prospective client as Domani’s solicitation to effect or attempt to effect transactions in securities, or the rendering of personalized investment advice. Any subsequent, direct communication by Domani with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Domani, please contact the SEC or the state securities regulators for those states in which Domani maintains a notice-filing. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Domani, or any non-investment related content, made reference to directly or indirectly in this communication will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this communication serves as the receipt of, or as a substitute for, personalized investment advice from Domani. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Domani is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Domani’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Domani client, please remember to contact Domani, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Domani shall continue to rely on the accuracy of information that you have provided.