Q2 2020 Market Commentary

The Markets

Stocks rebounded from a dismal March by posting their best monthly returns since 1987, as investors were encouraged by the expectation of additional government stimulus programs and hope that the economy would be reopening soon. The Paycheck Protection Program and Health Care Enhancement Act provided funding for additional small business loans, and offered financial support to hospitals, while increasing the availability of more virus testing. The Federal Reserve added trillions of dollars in funds to its lending programs. A few states began easing lockdown restrictions and reopening a range of businesses. While there were plenty of ups and downs in the market during the month, April closed with each of the benchmark indexes listed here climbing notably higher. The Nasdaq gained 15.45%, followed by the Russell 2000, the S&P 500, and the Dow.

In May, investors continued to rally to stocks as more states and foreign countries eased restrictions put in place in response to the COVID-19 pandemic. The economy continued to stagger, however. The unemployment rate reached its highest level since the Great Depression while claims for unemployment insurance pushed past 25 million. On the other hand, news of possible breakthroughs in the treatment of COVID-19 cases and the development of a vaccine for the virus provided optimism for investors. Once again, the Nasdaq led the way, advancing 6.75% by the close of May. The Russell 2000 gained 6.36%, followed by the S&P 500, and the Dow. 

June was a month of drastic highs and lows for stocks. The Dow climbed 6.8% in the first week of the month, then fell 5.5% in the second week. However, by the close of June, each of the indexes listed here posted gains with the tech holdings of the Nasdaq leading the way, up nearly 6.0% from its May closing value.

The second quarter of 2020 notched the best quarterly performance since 1998, with each of the benchmark indexes making sizeable gains over their historically poor first-quarter tallies. However, much of the second-quarter growth in the stock market and economy is more of a bounce back from a dismal March and April, when pandemic-related lockdowns and restrictions virtually shut down the economy. Nevertheless, stocks rose as investors focused on favorable economic data and the possibility of further government stimulus, despite rising virus cases and tepid trade relations with China. Of the benchmark indexes listed here, the Nasdaq again proved the strongest, soaring more than 30.0% for the quarter, followed by the small caps of the Russell 2000, which gained 25.0%. The large caps of the S&P 500 and the Dow closed the second quarter up nearly 20.0%.

Year to date, the Nasdaq remains the only index well ahead of its 2019 year-end closing value. While still in the red, the S&P 500 is within 5.0 percentage points of last year’s final mark, followed by the Dow and the Russell 2000.


Market/Index                 2019 Close      As of June 30    Monthly Change      Quarterly Change     YTD Change     
DJIA 28,538.44 25,812.88 1.69% 17.77%  -9.55% 
Nasdaq 8,972.60 10,058.77 5.99% 30.63%  12.11% 
S&P 500 3,230.78 3,100.29 1.84% 19.95%  -4.04% 
Russell 2000 1,668.47 1,441.37 3.4% 25.00%  -13.61% 
10-year Treasuries 1.91% 0.66% 2 bps 3 bps -125 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.


The Stock Market Versus the Economy

It’s fair to say that many of our clients have been pleasantly surprised (or even shocked!) as they’ve checked their account balances over the past month and a half. It’s also fair to say we’ve been pleased with the discipline and stick-to-it-iveness of our clients. For example, for our clients who rode out the volatility with a roughly 60% equity, 40% fixed income portfolio – they are likely modestly positive in their retirement accounts (just under 1%) and modestly negative in their taxable accounts (just about 1% under). While this certainly isn’t cause for celebration, it’s a testament to both our focus on risk management and our clients’ trust in our process. Nonetheless, why has the market recovered so quickly? When we look around – we see restaurants closed, retailers with less foot traffic, and hotels sitting vacant. Yet the market is barely negative for the year, so who can blame anyone for being confused? Obviously, there’s still a substantial amount of uncertainty and volatility ahead, but hopefully, we can lend some color to why the market is where it’s at. 

First and foremost, there’s been an unprecedented government response from both Congress and the Federal Reserve. When you total up the alphabet soup of programs that have been created, it comes to roughly $2.5 trillion (and we wouldn’t be surprised if there was more on the way). And importantly, the market is a forward discounting mechanism, what’s that mean? That means it’s trying to predict public companies’ future earnings 3 to 5 years out, it isn’t trying to reflect the economic picture we see today. Simply put, the stock market is not the economy. The economy certainly matters to the markets, but it’s important to differentiate between the two. As you’ll see below; hotels, tourism, and transportation (sectors certainly affected by COVID-19) account for roughly 20% of our gross domestic product (GDP) and employment. However, they only account for 7% of the S&P 500’s operating earnings. To put this in perspective, the five largest companies in the S&P 500 are Microsoft, Apple, Amazon, Facebook, and Google. They just aren’t companies that are terribly affected by COVID. 

Simply put, those hotels, tourism, and transportation aren’t a large portion of the public markets. Does that mean the market is priced appropriately? That’s always up for debate, but hopefully, this helps you understand why the market is at where it’s at. 

Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Factset, S&P 500, J.P. Morgan Asset Management. Consumer spending (2019 annual): membership clubs, sports, amusement parks, campgrounds, movies, theaters, museums, libraries, casino gambling, purchased meals and beverages, packaged tours, air and water transportation, hotels and motels, and select retail goods and services. Employment (January 2020): air and water transportation, transit and ground passenger transportation, support activities for air and water transportation, arts, entertainment, recreation, accommodation, food services and drinking places, and retail ex-food and beverage stores. Earnings (2019 operating): hotels restaurants and leisure; airlines; select entertainment and travel booking companies; multiline and specialty retail; and textiles apparel and luxury goods. Data are as of June 22, 2020.


Despite what we hope is some good news for your account balances, we know this an extraordinarily stressful time for many of our clients. As always, we hope our work for you allows you to focus on what really matters to you – your friends and family. We hope everyone had a wonderful and safe 4th of July. It’s our sincere wish that we can return to normalcy sooner rather than later.

Heartland TrustQ2 2020 Market Commentary

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