Q2 VF View: 2020 Review Mirror

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Market Commentary

2020 Rearview Mirror 

  • Australian wildfires 

  • Iranian General Qasem Soleimani killed by US drone strike and Iran strikes back 

  • Prince Harry and Meghan step down from their Royal duties 

  • Iran shot down a Ukrainian flight it mistook as a threat killing all 176 passengers 

  • Wuhan China goes into lockdown 

  • Kobe Bryant, daughter and 7 others killed in a helicopter crash 

  • NASCAR and Bubba Wallace make the news 

  • UK withdraws from the European Union 

  • Homeschooling becomes a way of life 

  • Full moon, Friday the 13th, and time change all in the same week 

  • Toilet paper in short supply 

  • TV show Cops pulled from the air after 31 years 

  • Iowa caucus created a quality control nightmare for politicians 

  • Cam Newton replaces Tom Brady in New England 

  • Trump impeached and acquitted 

  • George Floyd killed in MN spurring BLM protests 

  • Weinstein found guilty 

  • Italy is the first country to go on full lockdown 

  • Summer Olympics postponed 

  • US issued $2.9T stimulus package 

  • Oil futures contracts trade negative for the first time ever 

  • NASA and SpaceX launch first manned spacecraft from US soil since 2011 

  • Tiger King becomes the most popular show on Netflix in US and abroad 

  • Kim Jong Un of North Korea apparently died…then came back to life 

  • Boy Scouts of American files for bankruptcy protection 

  • Two words…Murder Hornets 

The above is just a list of things that come to mind in this whirlwind that has been the first six months of 2020.  What comes to your mind?  Did the worst point drop in United States stock market history come into your mind?  What about the fastest recovery from a 30%+ decline?  Among everything that has happened this year, the S&P 500 ended the second quarter down 3.1% year-to-date.  So how did we get here? 

The US economy is driven by consumption.  As the graph below shows, over 67% of our economy depends on the consumer to spend money.  If the consumer does not have the opportunity for spending, either businesses are closed or they have lost their source of income, our real GDP (fancy word for our countries output) must decline.  In the 1st quarter of this year, we saw a decline of around 5% as the “closed for business” signs began to pop up all over the country.  Early estimates for the second quarter point towards a decrease in GDP of around 50% as unemployment pushed over 15%! 

 

 

Following the largest point drop in history, why did we see the best 25-day recovery in the US economy while businesses were shut down?  And why are we inching towards new all-time highs?  Congress stepped in to ensure the consumer still had cash in their pockets to spend by passing a nearly $3 trillion stimulus package.  Some argue that they were a little slow to respond, but when they did respond, they responded with a massive stimulus.  The CARES Act provided one-time cash payments, extended unemployment benefits, and small business relief.  Why nearly $3 trillion?  As mentioned earlier, the US economy was expected to contract by 50% in the 2nd quarter.  With a $20 trillion GDP, a 50% decline in one quarter would equal around 12.5% of annual GDP (or around $3 trillion).  The largest of the programs are outlined in the following graphic. 

 

With Federal unemployment benefits coming to an end July 31st, there were discussions in Congress about a second round of stimulus.  The issues is expected to be taken up by Pelosi and McConnell after Congress returns from the July recess ends on July 17th.  Most pundits are expecting another $1 trillion stimulus that will focus on state and local governments and extending and phasing out the Federal unemployment benefits. 

While some companies have thrived during the COVID downturn (think Amazon, Zoom, grocery stores, or any food delivery service) some industries are just starting to return to normal, while others may see disruption for some time to come. 

You may ask “With markets nearing all-time highs, is there still upside potential?”  Absolutely!  There have been WIDE differences in how various asset classes have performed this year.  Large Growth stocks (technology-heavy) are up 10% in 2020 while small value companies (financial and energy heavy) are down 24%.  In every meeting, we look at your pie chart (see example below) and talk about how you need a mix of all the different categories.  We view this as a wonderful opportunity to sell technology and buy small and international companies.  Said another way: buy low…sell high. 

 

As the initial list above showed, we live in a world with unexpected twists and turns, new events happen that we couldn't fathom a couple of months or a few years ago.  There are risks and opportunities everywhere and as a guide on how to react to them, please see one of my favorite graphics from the NY Times and fellow financial planner Carl Richards.  It is a great reminder in these uncertain times.  

We appreciate the opportunity to serve you!  If you have any questions, please do not hesitate to reach out to your VF advisory team. 

The opinions expressed in our blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this blog is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.