In this post, we share five important lessons learned during the first half of 2020 and provide our outlook for the second half of 2020.
After a roller coaster start to 2020, with US stocks falling from their all-time highs by more than 30% and then subsequently rebounding 35+% off the bottom, many investors are scratching their head asking, “where do we go from here?” In this post, we share five important lessons learned during the first half of 2020 and provide our outlook for the second half of 2020.
5 Lessons Learned:
- High quality fixed income (weighted average AA+) is a must to hedge equity volatility.
- Having a clearly defined rebalancing policy in your investment policy statement brings discipline to decision making when decision making is difficult.
- Investment strategies can move in and out of favor, but so long as it’s a diversified and reasonable strategy, staying disciplined to it is likely to reward an investor over the long term instead of chasing what’s in favor.
- Having technology that allows our clients to know where they stand daily in terms of allocation, performance, and overall balances significantly helps decision making
- Consistent and frequent communication was integral in understanding each client’s unique needs and game planning a strategy for moving forward.
Second Half 2020 Outlook
Global stocks have rebounded significantly from their first quarter declines driven by fiscal and monetary stimulus, optimism over easing of lockdowns, and the potential for treatments of COVID-19. While recent economic data has been encouraging, the International Monetary Fund estimates that US GDP will decline by 5.9% for the year. The Congressional Budget Office projects it could take a decade for the economy to fully recover from the pandemic and business shutdowns. After new cases had begun to plateau, several states have seen new cases begin to surge, prompting questions about current business reopening plans. How well states can manage their business re-openings and limit new cases are the significant questions weighing on US equity markets.
The Fed has taken on numerous emergency measures to blunt the impact of the virus. Investors will be paying close attention to future meetings and comments by Fed Governors to hear their thoughts on the economy and how long it will take to recover. Any additional actions taken by the Fed are likely to be well received by the market as well.
Abroad, already weak economic growth was sent plummeting by the virus with many countries in Europe and Asia in a recession even before the significant declines in business activity seen in the second quarter. The European Central Bank estimates that eurozone GDP will contract 8.7% in 2020 and the World Bank estimates that the global economy will contract 5.2% this year. Central banks have taken significant steps to try to support their countries’ economies and the EU is currently attempting to pass a contentious rescue package. Investors will be keeping a close eye on COVID-19 case numbers for any additional surges as well as any additional measures central banks or governments take.
The Federal Government has passed several rescue measures to support the economy totaling $2.9 trillion, however, more fiscal stimulus will likely be needed. The additional fiscal stimulus could focus on an infrastructure spending plan. There has been on again off again discussions between Congress and the President on an infrastructure spending bill over recent years, but the recent turn in the economy might drive an agreement on the measure. Funds to improve the nation’s infrastructure, while also providing an opportunity for work for many newly unemployed, would be positive for the economy. Discussions are ongoing for another round of stimulus, but no concrete plans are imminent.
Geopolitical unrest in Hong Kong, North Korea, the Middle East, and elsewhere around the world remains a threat to stability in the market and if tensions were to rise, we could see additional reasons for investors to flock to safe haven investments.
Earnings results have consistently topped expectations in recent quarters, and it was the same in the first quarter with earnings outpacing significantly lowered expectations. Earnings dipped nearly 15% for the first quarter and analysts estimate they will fall 43% in the second quarter – the worst decline since the Financial Crisis. More than 40% of companies in the S&P 500 have withdrawn their earnings guidance over the remainder of the year due to COVID-19. The degree to which corporations can navigate the problems brought on by the virus’ spread will be a significant driver in their earnings and, in turn, stock market performance.
1 US Stocks are represented by the Russell 3000. Source: Morningstar, LLC. Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. In US dollars. Data is calculated off rounded daily returns. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful.