The second quarter of 2020 was a historic one by almost any economic metric. But, while we saw the worst economic decline in most of our lives, we also witnessed the current willingness of governments to act quickly to curtail economic decline and the resulting resiliency of the markets. We now look to the future to determine if the monetary and fiscal stimuli were worth the cost.
As we know, the month of March saw markets in a downward slide, as much of the economy was effectively shut down in the middle of that month (like many others, we at Atlas, vacated our offices and began working remotely on about March 11). It was weeks earlier, however, in February, that the markets began their slide. In late February, the S&P 500 stood at over 3385, an all-time high. But as we all know, scarcely a month later it stood nearly 35% lower, making the selloff one of the steepest and sharpest in market history.
Never before have we seen a near-complete shuttering of the U.S. and global economies, and what that might mean for asset prices was something of an unknown. Companies quickly retracted forward profit projections. Economic reports were scary, to say the least. But, the markets quickly shifted from discounting the intermediate economic impact of the global pandemic to projecting a possible recovery in 2021. In the three months from the March 23 bottom, the S&P 500 returned 36.3%1. As we’ve witnessed through history, investors that traded out of the market based on the immediate headlines in the midst of the crisis, were left behind.
What has been quite surprising is the performance of certain sectors in the market recovery. While the range of sector returns is not great (all sectors have done unusually well in this rally), the leaders were somewhat unexpected. From March 23 to June 24, the leading sector in the S&P 500 was, in fact, the Energy sector. Granted, the Energy sector was coming off a historic low, but the next four leading sectors were also cyclical sectors. This indicates to us that the market has taken the view that the eventual economic recovery will perhaps be soon, and big.
While some would argue that current market levels are unrealistically optimistic, the fact is that the 65 trading days following the March low represented the third strongest three-month rally in history. Only the rallies that began on March 9, 2009, and November 9, 1982, exceeded it. Interestingly, in both those prior cases, the S&P returns a year from there were also quite attractive – +13.1% and 14.3% respectively2.
While market history can be instructive, it is not a perfect guide. So, we at Atlas remain wary and tilted slightly defensively in our allocations. In our view, this situation is different, in that we do not expect a sustained recovery to take hold until a vaccine for the Covid-19 virus is developed and widely distributed. Whether this means that the virus remains simply a headwind to economic growth or the second wave of infections develops causing another economic shutdown is yet to be known. But no amount of policy-making or stimulus will overcome the fact that the virus remains a formidable adversary.
As we go forward, we would expect that markets will take some time to digest the recent rally and look for signs of future direction. At this point, we are hopeful that a vaccine may become available either late this year or early in 2020. To the extent that that moves in a positive direction, we can look toward a return to economic and financial indicators to guide our investment decisions. We feel that some of the keys to determining fair value in markets will be the prognosis for a timeframe to return to previous levels of economic output, and the potential for further economic expansion, as well as the ability for companies and governments to deal with the debt overhang from this crisis. Those are not things that can be determined in the coming days or weeks, but rather months or years. In the meantime, we’re comfortable with our defensive tilt, our allocations within portfolios, and our ability to respond at the appropriate times to adjust positions.
Please feel free to contact your Atlas Wealth Management Advisor if you have any questions about this or any other financial matter. As always, we are always available to serve you.
John C. Ogle
Chief Investment Officer
1 – Bloomberg Professional Services
2 – Strategas Technical Strategy report 6/25/2020