WESCAP Group 2020 2nd Quarter Market Update
Global monetary and fiscal stimulus on an unprecedented scale along with business reopening measures have done wonders this last quarter for global stock markets, commodities and credit-sensitive fixed income markets.
Second quarter total returns were positive for most assets including: S&P 500 (+20.5%), Small cap stocks—Russell 2000 (+25.4%), foreign developed markets—EAFE—stocks (+14.9%), emerging markets—MSCI—stocks (+18.1%), commodities—Goldman Commodities index (+10.5%), and U.S. high-yield bonds (+10.2%). A few assets acted as safe havens the first quarter and for the second quarter they performed as follows: U.S. T-bills (+0.0%), US T-Bonds—20+ Years (+0.1%), Aggregate U.S. Bond index (+2.9%) and gold (+12.1%).
However, the Coronavirus is not done with the world, and the economic damage to many businesses and households cannot be offset forever by government stimulus programs. What is really needed is a widespread, safe, Coronavirus vaccine so that people and businesses can get back to normal. We do expect this to happen, though the timing is uncertain.
Some businesses and jobs will recover quickly as businesses forced to shut-down are allowed to re-open. We expect a large surge in employment and economic growth to ensue for several more months. After that, it gets a lot tougher. Many businesses will have been wiped out. Others will operate at reduced capacity for many years. Therefore, we can expect unemployment to remain elevated for years and for consumer spending to take years to get back to pre-Covid-19 levels.
Despite a second surge in Covid-19 in parts of the U.S., we don’t expect massive reclosures as occurred in March and April. Better treatments, more testing, more ventilators and safety equipment should allow for a better response going forward than in March. Plus, there is less public and political will to shut down activities as before.
Slower growth and reduced revenue are putting a strain on government finances and services. Pressure for higher taxes will build over the coming years. If we see higher corporate and capital gain taxes, we would likely see many equity assets fall in intrinsic value by 10% or more. Low interest rate policies that are expected to persist for many years will be great for borrowers and help keep stock and real estate prices elevated, but will not be good for savers. High-quality fixed income assets currently have such low yields that taking calculated risks in other fixed income and hybrid assets has become a priority.
The pandemic is reshaping shopping, leisure, and business activities. The challenge is to determine which changes are temporary and which are permanent and to separate the winners from the losers.
Our investment goal is to discern the winners from the losers, for both equities and fixed income assets, taking into account valuations, potential returns and risks. This is a difficult task as uncertainty is high. Currently, we favor assets in which the uncertainty factor is less pronounced. Contact us for more details.