The S&P 500 Index notched its best quarter since 1998 with a 20.5% return, nearly erasing its first quarter loss. Developed and emerging market equity indices posted returns approaching 20%. High yield bond and emerging market debt markets were up over 10%. Oil prices doubled, closing at roughly $40 a barrel (WTI). However, year-to-date returns across these market segments remain negative, and some in red double-digits. The Russell 1000 Growth Index, up nearly 10% ytd due to its heavy weight in high-flying technology stocks, is a lone exception.
While Wall Street was in celebration mode, much of Main Street continued to suffer. Against the backdrop of stellar asset price performance, rising cases of the virus in the U.S. tempered optimism going into quarter-end. Some cities have reversed their re-openings as new COVID-19 cases have mounted. While certain economic data have surprised on the upside (from very depressed levels), much uncertainty remains. “The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus,” said Fed Chair Jerome Powell at a recent meeting. “A full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities.”
Officially, the U.S. economy entered a recession in February 2020, according to the National Bureau of Economic Research. Some estimate that we emerged in May, which would make this the shortest recession ever. A number of promising statistics point to a rebound—but it should be noted that they have yet to recoup the losses incurred in March/April. Retail sales grew a record 18% (-6% year-over-year) in May. Durable goods orders also delivered on the upside; up 16% in May (-18% yoy). And housing received a boost from relatively low mortgage rates. Pending home sales were up 44% in May, but remain down 5% yoy. Personal spending rose 8% in May, a monthly record, but is down 9% yoy. Further, certain segments of the economy have not participated in this recovery and are likely to be impacted for some time. Hotels, restaurants, airlines, and many small businesses have been among the hardest-hit.
Not all the economic data have been good. While roughly 5 million jobs returned in May and June, 19 million were lost in April. Unemployment (11.1% in June) remains elevated, and while jobless claims have decelerated, they continue to hover around 1.5 million per week, with those receiving state benefits at roughly 18 million.
Further evidence of the ongoing stress is reflected in downgrades and defaults. According to data from J.P. Morgan, defaults across bonds and loans total $100 billion thus far in 2020, already the most since the entire year of 2009, and defaults in U.S. high yield bonds reached a 10-year high of 6.2%. As for equities, a recent Wall Street Journal article noted that “more than 40% of the companies in the S&P 500 have pulled their guidance as the coronavirus pandemic has doused U.S. corporations in uncertainty.”
First quarter GDP contracted 5.0%, but the second quarter is expected to be far worse, with estimates spanning a wide range (-30% to -40% annualized) and changing by the day. For 2020, the median expectation from the Fed is for a decline of 6.5%, but the range among FOMC members is -10.0% to -4.2%. Fed forecasts for 2021 are similarly disparate, with a median 5.0% gain and a range of -1.0% to 7.0%.
A tsunami of central bank support and fiscal stimulus fueled confidence and pumped liquidity into the markets. The Fed not only left rates at close to 0%, but it also announced that it would likely leave them there until at least 2022. Fiscal stimulus in a multitude of flavors approaches $3 trillion, nearly 14% of GDP, and globally the figure is a stunning $8 trillion, or 9% of global GDP, according to Natixis PRCG and the International Monetary Fund. While some of these programs have been controversial, collectively they have been incredibly effective in restoring liquidity and confidence. In some cases, a mere announcement had a significant impact on markets before the program was implemented.
Overseas, a similar story unfolded. Central bank support and rate cuts have bolstered confidence and liquidity; some economic indicators seem to indicate the worst is over. However, it is worth noting that virus-related statistics are far more favorable in Europe and Asia than in the U.S. And emerging markets have not seen their “virus curves” flatten, especially in Latin America, India, and Russia. Far from rosy, the OECD recently released its global 2020 real GDP forecast: -6.0%—and this assumes no “second wave” for the virus.
