The 2nd quarter saw a tremendous recovery in global markets, leaving many people surprised as the market seemed to move upward in the midst of a lot of bad news. This is not unusual, as the market is a leading indicator of expectations and will typically move in anticipation of bad or good things happening.
A good example of this is from a data point I shared recently, showing stock returns are generally quite high when the unemployment rate is quite high:
Many were scratching their heads after the market rose 13% in April, while the unemployment rate was 14.70% and we saw the largest retail sales decline ever recorded. Fast forward to June and the unemployment rate has dropped to 11.10%, and May saw the largest ever retail sales growth.
While the US Stock market has performed strongly considering everything that has occurred, some might be surprised to know that the Chinese stock market has done even better, and is actually up 3.50% for the year through June 30th.
And of course for all of you Finnish stock enthusiasts, the Finland stock market is also outperforming the US for 2020 but we’ll check back on them once we get to the Finnish line.
Let’s look at a few major asset classes and how they fared during the 2nd quarter.
|Second Quarter 2020|
|US Small Cap Value||AVUV||30.57%|
|US Stock Market||VTSAX||22.08%|
|International Small Value||AVDV||22.22%|
Small cap value had a premium return during the quarter, but it had a premium decline in the 1st quarter, and thus still lags rather significantly for the year. Bonds have done their job this year by protecting on the downside, but with rates cratering you would expect lower returns in the future from this space.
Wharton Professor and famous author, Jeremy Siegel, makes a case for increased inflation expectations ahead which would be pretty bad news for intermediate and long-term fixed income investors. While I have come across dozens if not hundreds of predictions in my short career about the end of the bond bull market (all of which have been wrong so far), there is some validity to the argument.
Siegel states in a recent podcast interview, that during the Great Recession the M1 and M2 money supply grew about 15% – 20% over the course of a year, while during our more recent crisis we saw a 25% increase in 8 weeks. M1 money supply consists of physical currency, demand deposits, travelers checks etc. M2 is a broader measure of the money supply, which also includes cash, money market funds, and checking deposits.
If inflation would reach the 4% – 5% annual range that Siegel suggests, fixed income earning 1% – 2% (before taxes) could be an abysmal investment. A good method to protect against inflation in fixed income historically has been TIPS (treasury inflation protected securities) where you earn a stated rate plus the rate of inflation, which is variable. Unfortunately a 5 year TIPS today comes in at a -0.97% real yield, meaning you are guaranteed to lag the rate of inflation by close to 1% annually.
The virus continues to spread like wildfire throughout the country, but there is some optimism. While cases continue to rise, deaths continue to plummet. It’s hard to say whether or not we should be alarmed but rising case counts, but we should certainly be alarmed if hospitalizations and deaths are rising. You would think deaths would lag cases, and there may be a spike that in regard soon. If not, maybe there are some positive signs that we have found better treatments or done a better job at protecting those most susceptible.
Expectations For the Second Half
All evidence suggests that market forecasters are as accurate as a coin flip, so any prediction is simply a guess and the result of a lucky guess should not be attributed to skill. People that continually participate in market guessing activities and believe their next guess will be more accurate than their last are ignoring the empirical data on the subject.
As we move full throttle into election season, investors who align with a conservative political mindset will be nervous of the other side taking power, and those aligning with a liberal mindset will be nervous of the republicans keeping the Senate and the House. If you let your political beliefs influence your investment decisions, there’s a very good chance you will regret it.
Those who believe the economy will perform better under one regime than the other, and therefore stocks will do better under that regime, may be surprised to learn of the evidence that shows GDP Growth and stock market returns have a very weak relationship.
Further, it is difficult to see a relationship between Presidential party affiliation and stock market returns:
There will be lots of noise between now and November, and probably a few more scary news events. By the time you’re able to react to them, the market already has and there is generally not an edge to be gained by doing so.
This article is for informational purposes only and is not a recommendation of Meredith Wealth Planning or Mark Meredith, CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the Article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the Article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.