Welcome back readers. For market participants, the second quarter of 2020 was one to be remembered. For advisors, implementing portfolio strategies, it has been quite exhausting.
The first quarter of 2020 ended with the key stock indices down; -20% for the S&P 500, -23% for the Dow and the Russell 2000 small caps fell -30%. However, in the 2nd quarter, equity markets recovered very quickly, responding to the historical Federal Reserve stimulus package intended to stabilize the economy and markets. That said, even with a nice V-shaped recovery in some parts of the equity market(s), there are large bifurcations taking place in many of the market indexes, sectors, regions, and individual countries. Year to date (YTD) key equity index market returns are as follows:
S&P 500 (-3%)
Dow Jones (-8%)
Russell 2000 (-12%)
Profitable strategies for 2018 and 2019 in terms of asset allocation weightings and individual equity sectors shifted dramatically in 2020 and in an extraordinarily condensed time. Due to macro shifts in the economy, it’s imperative for investors to stay nimble, with ability to deploy cash on large market swings and remain much more diligent in terms of analyzing and understanding risk in a portfolio.
The U.S market, as well as international markets, are dealing with two opposing forces that have never been seen, tested, or modeled in the financial system. These events are a novel, fast-spreading, and lethal virus that dragged the U.S economy into recession and, in response, an unprecedented global monetary and fiscal stimulus. We have quite a bit to cover here in a brief newsletter, but we will do our best to break it down as succinctly as possible.
Is the U.S. in a recession?
Yes. Recessions are defined as either being cyclical, structural or event driven in nature. Each of these recession types are distinctively different in terms of historical length, depth, and economic destruction. The Covid virus and its financial repercussion is an “event-driven” global recession. Covid-recession, officially starting February 2020, terminated an amazing expansion of 128-months duration, the longest ever recorded, dating back to 1854. Not even during the Great Depression or following WW II have so many countries entered a recession simultaneously. The good news is that “event-driven” recessions have shown to fare best in terms of recovery from associated market decline as well as total duration when compared to structural and or cyclical driven recessions.
Ok its a recession, why did the markets go up in Q2?
Investors are betting on two things to happen in late 2020 and in 2021. Firstly, continued Federal Reserve support until vaccine or therapeutics mitigate the virus and it’s contagion. Secondly, a quick U.S economic recovery to follow once said viral containment(s) develop. Both of these outcomes are certainly possible, and the market has decided to look past the current economic carnage around us (including earnings) and focus instead on the more optimistic scenarios.
It should be noted that while the equity markets have somewhat recovered, this “recovery” is largely driven by “big tech”. Apple, Amazon, Google, Microsoft and other large technology companies have been the real underlying drivers of the market putting up solid 2nd quarter numbers. The QQQ index represents the NASDAQ 100 largest tech companies and investors can see the striking YTD outperformance compared to the 30 largest companies in the U.S that comprise the DOW Jones average.
Will volatility continue and what can we do to take advantage?
Historic market volatility in 2020 is displayed below. We have eclipsed 1928 numbers, (Great Depression), in terms of market gyrations. As knowledge accumulates on the virus we expect volatility to stabilize in the back half of the year. However, this unfortunately does not necessarily indicate market direction. Most market analysts feel we are at the apex of the market averages given the real economic picture outside our windows. While volatility adds to investor (and advisor) unease, is not always terrible as we use it tactically as a re-balancing mechanism, stepping in and or out on advantageous share prices.
What are some portfolio changes to consider as we go into Q3?
We see portfolio resilience as more than just relying on broad asset classes or indexes. It is making sure portfolios are correctly weighted amongst sectors, geographical regions, countries, and company stock level. Diversification is key, as large return dispersion in the first half of the year has increased across asset classes. Granular analysis at the sector level is crucial to understanding exposure that will be tested until the virus is under control.
At Copper River we maintain a modest pro-risk stance and look to give fixed income and private equity its fair share of weighting inside a portfolio. Fixed Income always a staple of our firm given our background has had another impressive start to the year due to investor demand for high quality interest producing instruments.
In terms of equity we favor quality assets that have had tremendous earnings growth in 2020. This leads to an even higher respect and weighting to North America Technology (and various sub classes in the sector like 5G and semiconductors).
As we move into the back half of the year, we look forward to more normal market conditions but will be prepared to act quickly in terms of re-balancing and sector rotation should we face unexpected headwinds and or more major storms.
Have a great 4th of July holiday weekend and please call and or email us with any questions, concerns or needs.
Team Copper River