I never thought I would say this, but I miss the good old days when it seemed that all the financial markets had to be concerned about was the never ending U.S. – China trade saga. I think it is safe to say we would all take a financial crisis over a severe health crisis any day of the week. We are about to find out how much the coronavirus business closures have expanded the health crisis into a financial crisis.

Earnings season is upon us and it is going to be ugly. The second quarter of 2020 is expected to be (and hopefully will be) “trough” earnings for this business cycle. Investors will likely be looking past the dismal results for guidance from companies on what to expect going forward. Not surprisingly, many companies have forgone providing earnings guidance due to the high level of uncertainty caused by the virus situation.

Large company stocks seem unfazed by the destruction of earnings and the increasing spread of the virus in some parts of our country. Stocks rocketed higher in the second quarter from their depressed levels set in March due in no small part to the extraordinary stimulus provided by the Federal Reserve and Congress. Stocks as measured by the S&P 500 were up 20.5% in the second quarter and were down only 3.1% year to date as of the end of June. This strong performance was again driven by the mega-cap technology stocks that heavily influence this index’ performance. In a sign that the U.S. stock market is not as healthy as it might seem, small company stocks as measured by the S&P 600 remained down 17.9% through June. Foreign stocks also had a strong second quarter with the MSCI EAFE index of established foreign economy stocks and MSCI Emerging Markets index up 14.9% and 18.1%, respectively, in the second quarter and down 11.3% and 9.8% year to date. In a possible sign that a leadership change may be underway, emerging market stocks look like they have been shot out of a cannon and are up 8% this month as of July 13.

Despite the strength in stocks, bonds too have remained strong. Quite often money will flow between these two asset classes resulting in contrasting performance. Bond investors are said to be the “smart money” in the financial markets which leads some people to question the sustainability of this stock rally. It may be that with the incredibly low interest rates afforded by bonds, investors are recognizing the better long-term value of stocks. The average dividend yield of large company stocks well exceeds the current yield of the 10-year Treasury bond which tipped the scales at 0.65% as of the end of June.

While there are plenty of indicators flashing warning signs, there are some forces that could help support stock prices. For starters, there is a belief that our government will be quick to race to the rescue again with more financial stimulus should conditions further deteriorate. Also, there is a vast amount of cash on the
sidelines waiting to be invested. It is expected that much of this will find its way again into stocks given the low return on short term liquid assets. And while the virus situation in some regions of the U.S. is worsening, other parts of our nation and other countries are for the moment emerging more smoothly from the pandemic.

As I mentioned in my blog on June 10th “How High Can They Go?” which can be viewed on our website, I am of the view that caution is warranted and have positioned portfolios accordingly. Do not hesitate to contact me if you would like to discuss.

Sincerely,

Glenn S. Rank, CIMA®

Certified Investment Management Analyst®

President

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The S&P 500 is a broad-based unmanaged capitalization weighted index of 500 widely held large market capitalization stocks that is generally considered representative of the U.S. stock market. The S&P 600 is an unmanaged capitalization weighted index of 600 small market capitalization stocks. The MSCI EAFE index and the MSCI Emerging Markets index are unmanaged indexes compiled by Morgan Stanley Capital International that are generally considered representative of the developed international stock market and emerging international stock market, respectively. International securities involve additional risks including currency fluctuations, differing financial accounting standards, and possible political
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