Quarterly Market Commentary – Q2 2020

U.S. Stocks:

In the previous quarterly commentary, we emphasized the importance of following a long-term, disciplined investment strategy amid volatile equity markets across the world. (check out this infographic on how the stock market performed after every bear market over the past 100 years) Investors who stayed invested throughout the turbulent months of March enjoyed the best quarterly returns since 1998. From March 23rd to June 30th, the S&P 500 Index rallied almost 40%. Interestingly, in spite of this rally, the Federal Reserve states that retail traders still have almost $13 trillion in liquid assets (cash and equivalents), the largest cash balance in recorded history. Retail investors increased their liquid assets by $2 trillion in 2020 alone.

The best performing sectors for the quarter were Consumer Discretionary (+ 33.4%), Energy (+ 33.3%), and Information Technology (+ 33.1%). The Covid-19 pandemic has been a boon to technology firms across industries as work-from-home trends increase the need for technology and innovation. This shift in consumer behavior has contributed to the bifurcation of the stock market. Financial, Industrial, Materials, and Energy firms now make up only 25% of the S&P 500 Index compared to over 60% in the 1950s.

It might seem that the stock market’s remarkable performance is not in line with reality given the ongoing global pandemic and economic shutdowns. However, the stock market has always been a forward-looking indicator. In general, the current rally could be attributed to three things – a global slowdown in coronavirus cases, aggressive fiscal and monetary response, and the expectation of a V-shaped recovery in corporate profits by 2021.

Despite the strong rebound in equities, the threat of a second Covid-19 wave coupled with less monetary and fiscal support continues to linger. Data compiled by J.P Morgan shows that on average it takes three years for companies to recover profits lost in a recession. If history holds true, current Wall Street estimates for corporate profits might be too aggressive. So far, 75 U.S. companies filed for bankruptcy protection in Q2 with liabilities over $50 million, mimicking the 2008 Financial Crisis. Traditional safe-haven assets such as gold (up 12.12%) also posted strong returns despite the stock market moving higher.

Click, to learn more about how the stock market performed after every bear market:
Notable and Interesting Company Specific Headlines:
  • Retail investors and fear-of-missing-out: With 34% of domestic equity holdings, U.S. households control a meaningful portion of the stock market. Online brokers such as Robinhood have made investing ever more accessible and affordable to a growing group of retail investors. Amid the stock market’s remarkable recovery in Q2 2020, a lot of freshly minted retail traders jumped in the market chasing quick gains. Allianz Research indicates that in Q2 2020 retail trading volume tripled and average online trades per day skyrocketed from one to seven.
  • FAANG+ stocks continue to drive stock market dispersion: The notorious FAANG+ stocks (Facebook, Apple, Amazon, Google, Netflix, and Microsoft) continue to drive most of the stock market’s performance. These six mega-cap stocks now make up 22% of the S&P 500 Index (up from 18% in February), and they are valued at 42 times trailing 12-month P/E. To give some perspective, the combined market capitalization of these six companies is almost as much as all S&P 500 Index companies in the Financial, Industrial, Materials, and Energy sectors combined.
  • Tesla, now the world’s most valuable car company: The electric car maker, run by Elon Musk, surpassed Toyota ($200 billion market capitalization) to become the world’s most valuable car company with a $208 billion valuation. In 2019, Tesla sold 367,000 vehicles and made $24.6 billion in revenue. In comparison, Toyota sold over 10 million cars and made $281.2 billion in revenue. Gilead announced that its Covid-19 treatment, Remdesivir, would cost $3,120 or less per person. The company is choosing not to maximize profits to avoid public backlash given the already rising tensions between politicians and drug companies.
  • Gilead and the Covid-19 vaccine: Gilead announced that its Covid-19 treatment, Remdesivir, would cost $3,120 or less per person. The company is choosing not to maximize profits to avoid public backlash given the already rising tensions between politicians and drug companies.
  • Hertz, the bankrupt company with a rising stock price: Hertz, the nation’s second-largest car-rental company, filed for bankruptcy on May 22nd. Even though Hertz is destined to be delisted from the New York Stock Exchange, the company’s stock exploded in price between May 26th and June 8th. Hertz’s stock price skyrocketed from 56 cents to $5.53 a share, which is almost a 1,000% increase. Hertz tells a cautionary tale of a recent uptick in inexperienced retail investor trading on platforms such as Robinhood. Roughly 100,000 Robinhood investors bought Hertz stock after the bankruptcy announcement out of pure speculation and fear-of-missing-out. After a brief 1,000% gain in the stock price, the stock trades for under $1.50/share as of July 1st.
  • Boycott against Facebook: The social media giant has been targeted by a growing group of companies such as Coca-Cola, Ford, Microsoft, and Starbucks. These companies are pulling advertisement spending from the platform to protest Facebook’s lack of censorship on hate speech. Facebook believes it is not the platform’s job to fact-check political ads or exclude anything except for the most outright harmful points of view from the platform.
United States Economic News:

The 2nd quarter of 2020 posted some of the most record-breaking economic data in recorded U.S. history. The Business Cycle Dating Committee defined February 2020 as the final month of the longest expansion on record, and the first month of a recession – the Global Coronavirus Recession. Consensus estimates call for a 35% decline in Q2 2020 GDP, which would be the sharpest quarterly decline in recorded U.S. history. Lockdown induced unemployment peaked in April with 20 million Americans losing their jobs. Out of the 20 million job losses 8.6 million came from the leisure and hospitality sector. To add perspective, 8.6 million is more than all the jobs lost in the 2008 Financial Crisis. Both the ISM Manufacturing and Services Index posted sharp contraction in April. On the flip side, Bloomberg estimates that U.S GDP may rebound as much as 30% in Q3. The job market is also showing strengths, adding 8 million jobs in May and June. Both the ISM Manufacturing and Services Index recorded sharp expansion in the month of June. The V-shape like recovery in economic data could be attributed to easing lockdown measures across the country coupled with powerful fiscal and monetary support from the U.S. government and the Federal Reserve.

The Federal Reserve has taken drastic measures to support the U.S economy by pumping liquidity into the financial system and slashing interest rates to 0%. The Fed launched nine emergency lending programs to provide credit backstop to municipalities and small and medium-sized businesses. The central bank’s collective effort has helped lower borrowing costs and keep the financial system liquid to avoid a collapse similar to the 2008 Financial Crisis.

The federal government also played an aggressive role in providing liquidity to businesses and American households. The CARES Act pumped $2.3 trillion into small businesses and directly into American households. Currently, 30 million Americans are receiving an additional $600 in weekly unemployment benefits due to the CARES Act – set to run out on July 31st, 2020. The House passed a $3.5 trillion bill in May, which would provide $1 trillion in state aid, expanded unemployment benefits through January, another round of $1,200 stimulus checks, and funds for Covid-19 testing. Meanwhile, the Senate is working to pass its own bill that would cap any further government aid at $1 trillion.  At the current rate, J.P Morgan estimates that the U.S. Government will accumulate 125% of GDP in debt by 2030 (the most in the country’s history).

International markets news:

The International Monetary Fund estimates that the global economy may contract by 4.9% in 2020 but will experience a sharp rebound in activity to 5.4% in 2021.

The Euro-area economy is experiencing a V-shape like recovery in economic output as lockdowns ease across countries. The Euro-area Manufacturing and Services PMIs both rebounded sharply in June relative to April measures. Despite the V-shape like recovery, the Euro-area economy is expected to shrink by 8.8% in 2020 (2.3% more than the U.S. economy).

The European Central Bank (ECB) and European governments have taken drastic measures to stem the economic fallout from Covid-19. The ECB expanded its Pandemic Emergency Program by 600 billion euros to 1.35 trillion in June. Bloomberg Economics estimates that by 2022 the ECB will have contributed 4.5 trillion euros of liquidity to boost the European economy.

Sweden was one of the few countries in the world that didn’t enforce lockdown and quarantine measures. Interestingly, economic data from Sweden shows that even as lockdowns across the world ease, consumer behavior can remain muted. Early economic data from the Nordic country shows that air travel, accommodation, and food services dropped 40% to 85% from February through April.

The Chinese economy experienced a similar economic recovery as the United States and Europe. However, Bloomberg estimates that the Chinese economy will churn out a 2.1% GDP growth in 2020 as opposed to a 6.5% contraction in the U.S. and an 8.8% contraction in Europe.

Disclaimer1

1Taylor Hoffman is an SEC registered investment adviser with its principal place of business in the State of Virginia. Any references to the terms “registered investment adviser” or “registered,” do not imply that Taylor Hoffman or any person associated with Taylor Hoffman have achieved a certain level of skill or training. Taylor Hoffman may only transact business in those states in which it is registered /notice filed, or qualifies for an exemption or exclusion from registration /notice filing requirements. For information pertaining to the registration status of Taylor Hoffman or for additional information about Taylor Hoffman, including fees and services, please visit www.adviserinfo.sec.gov. The information contained herein is provided for informational purposes only and should not be construed as the provision of personalized investment advice, or an offer to sell or the solicitation of any offer to buy any securities. Rather, the contents including, without limitation, any forecasts and projections, simply reflect the opinions and views of the author. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change without notice. There is no guarantee that the views and opinions expressed herein will come to pass. This document contains information derived from third party sources. Although we believe these third party sources to be reliable, Taylor Hoffman makes no representations as to the accuracy or completeness of any information derived from such third-party sources and takes no responsibility therefore. The S&P 500 is a market capitalization weighted index of 500 leading U.S. companies and one of the most common benchmarks for the broader U.S. equity markets. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The Nasdaq Stock Market. Launched in 1971, the NASDAQ Composite Index is a broad based Index. Today, the Index includes over 3,000 securities, more than most other stock market indices. The NASDAQ Composite is calculated under a market capitalization weighted methodology index. To be eligible for inclusion in the Composite the security’s U.S. listing must be exclusively on the Nasdaq Stock Market (unless the security was dually listed on another U.S. market prior to January 1, 2004 and has continuously maintained such listing), and have a security type of either: American Depositary Receipts (ADRs); Common Stock; Limited Partnership Interests; Ordinary Shares; Real Estate Investment Trusts (REITs); Shares of Beneficial Interest (SBIs); Tracking Stocks Security types not included in the Index are closed-end funds, convertible debentures, exchange traded funds, preferred stocks, rights, warrants, units and other derivative securities. If at any time a component security no longer meets the above eligibility criteria, the security is removed from the Composite Index. The Stoxx Europe 600 is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 17 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The Shanghai Composite Index is a market capitalization weighted index made up of all the A-share and B-shares that trade on the Shanghai Stock Exchange. Past performance is not an indication or guarantee of future results. Investing in securities involves risks, including the potential loss of all amounts invested. Taylor Hoffman makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any of the research contained herein or with regard to the results to be obtained from its use. In no event will Taylor Hoffman or any party associated with Taylor Hoffman be liable for any direct or indirect trading losses caused by any information contained in this report. Readers must conduct their own independent analysis of the information contained herein before making any investment decisions.