2nd Quarter 2020 Update

July 17, 2020

Key Points

• The U.S. economy is now emerging from what has been termed the swiftest and most severe recession in U.S. economic history
• The Fed is sending a clear signal that it will maintain interest rates at current low levels (near zero) until the economy is back to full employment, which could potentially take multiple years
• While broad stock indexes had plummeted roughly 34% in about five weeks of trading in the first quarter, they surged approximately 45% from the closing low on March 23 to the quarter’s closing high on June 8
• To many economists, critical to a continuing positive outlook is the avoidance of a second wave of the virus

THE GLOBAL ECONOMY

The US economy remains mired in an economic maelstrom resulting from the lockdowns brought on by the COVID-19 virus. The phased re-opening that states have begun to implement has provided a boost to economic activity, but there are still many segments of the economy that will take time to recover. The anxiousness to re-open in hopes of having the economy return to pre-lockdown levels is now also being met with an increase in the number of new coronavirus cases in certain portions of the country. Still, governmental leaders and business owners are resolute in their efforts to re-open the economy while attempting to mitigate the effects of COVID-19.

The economic effects of the coronavirus became clear in the first quarter data (the latest quarter reported). The Bureau of Economic Analysis reported its third estimate of first quarter 2020 gross domestic product (GDP) of -5.0%, in line with the prior estimate, but of course far below the fourth quarter 2019 reading. The negative impact of COVID-19 on the employment situation was significant in March and April, with employers shedding 1.4 million and 20.7 million jobs, respectively. However, the May employment report showed an astonishing increase in the number of jobs, as 2.5 million were added to payrolls when analysts had expected additional losses of 7.5 million. The May report showed an average of approximately 6.5 million jobs lost each month of the quarter, and that the unemployment rate climbed to 13.3%. The Federal Open Market Committee (FOMC) maintained the aggressive monetary policy response to the crisis, leaving the funds rate target range of 0% to 0.25% unchanged. The central bank is unlikely to consider raising interest rates anytime soon.

The global economic environment is encountering historic supply and demand shocks that will take time to overcome. COVID-19 precipitated the swiftest and most severe global downturn on record. However, many economists believe that the worst may be behind us, and we are now embarking on what is likely to be a slow road to recovery that could potentially be hampered by a potential second outbreak of the virus.

Below, we’ve highlighted broader market returns for the 2nd quarter and year-to-date time periods:

Source: Refinitiv

FIXED INCOME

Fixed income securities’ prices generally trended higher (and yields lower) in the quarter with monetary conditions easing, and more of a risk-on environment beginning to take hold. Central bankers throughout the world remained very aggressive in their policy response to the economic effects of COVID-19. Volatility in both fixed income and equity markets also subsided during the quarter as businesses began to re-open. As mentioned above, the FOMC made no change to the previous policy steps it took in the first quarter to ensure sufficient market liquidity. As such, the FOMC is expected to maintain the target federal funds rate range at between 0% to 0.25% for the foreseeable future.

The shape of the Treasury yield curve was little changed during the second quarter, with yields on the shortest-term maturities rising modestly relative to yields in the intermediate-term segment of the curve

<

EQUITIES

While the health-related effects of COVID-19 were still playing out in the second quarter, stock prices staged one of the most impressive rallies on record as investors attempted to discount the magnitude and timing of an economic recovery. While broad stock indexes had plummeted roughly 34% in about five weeks of trading in the first quarter, they surged approximately 45% from the closing low on March 23 to the quarter’s closing high on June 8. Driving the rally was the belief that since the economic downturn was self-imposed, a re-opening of the economy might enable a recovery approximating the strength experienced prior to the lockdown.

Investors were heartened by the huge positive surprise in the May employment report, which showed that employers added more than 2.5 million jobs in the month when the consensus expectation had been a loss of 7.5 million jobs. The rally in stock prices came to an end in June; however, as new coronavirus cases were reported, potentially because of people wanting to resume normal activities after being in lockdown for months. As a result, stock indexes declined approximately 5% from their early June levels. However, when the quarter ended, the S&P 500 Index had surged 20.5%. International stocks also experienced significant gains during the quarter, and generally performed in line with US equities.

SUMMARY

The U.S. economy is now emerging from what has been termed the swiftest and most severe recession in U.S. economic history. The peak of the last expansion occurred in February, and the low point came in May, making the recession a short-lived three months, the shortest recession since at least prior to the Civil War. Driving the turnaround has been the quick pace of re-openings. According to Moody’s Analytics, in mid-April approximately 2,600 U.S. counties were in lockdown, representing approximately 30% of GDP. Currently, however, very few counties remain in lockdown. In addition to businesses re-opening, the FOMC’s aggressive initial policy response ensured liquidity and served to protect the financial system from the problems within the general economy.

The Fed is also sending a clear signal that it will maintain interest rates at current low levels (near zero) until the economy is back to full employment, which could potentially take multiple years. With a low interest rate environment that will last perhaps into 2022, investors have been willing to adopt a risk-on investment stance and bid up the prices of risk assets. Economists also believe that continued fiscal policy support will be critical to returning the economy to full employment as quickly as possible.

Some have questioned the efficacy of the fiscal programs put in place so far, but analysts are of the opinion that additional fiscal stimulus is necessary so that the rebound is not slowed, and that the economy does not experience a double-dip recession in the latter half of the year. To many economists, critical to a continuing positive outlook is the avoidance of a second wave of the virus. There has been an increase in positive coronavirus cases with the widespread re-openings, but so far the uptick does not appear to have stretched the health care system. It is encouraging to know that the worst of the negative effects of the virus are perhaps behind us, and that with continued monetary and fiscal policy support unemployment should continue to decline.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

St. Clair Advisors
6120 Parkland Blvd. Suite 306
Mayfield Heights, OH  44124
TEL: 216.925.5670 | FAX: 440.646.1838
www.saintclairllc.com