2nd Quarter 2020 Market Review
Thrivent Asset Management Contributors to this report: Mark Simenstad, CFA, Chief Investment Strategist; Darren Bagwell, CFA, Chief Equity Strategist; Steve Lowe, CFA, Vice President, Mutual Funds-Fixed Income; John Groton, Jr., CFA, Director of Administration and Materials & Energy Research; Matthew Finn, CFA, Head of Equity Mutual Funds; and Jeff Branstad, CFA, Senior Investment Product Manager
Even as the Covid-19 pandemic continued with no end in sight, the stock market staged a remarkable rebound in the 2nd quarter, as the S&P 500® climbed about 20% for the three-month period.
Oil prices also began to recover from a deep slump, as businesses began to reopen, and motorists began returning to the road. The price of oil was up more than 90% for the quarter.
According to the National Bureau of Economic Research (NBER), the U.S. officially entered a recession as of February 2020. Gross domestic product (GDP) dropped 4.8% in the 1st quarter, with a further drop expected in the 2nd quarter. While more than 40 million Americans have filed for unemployment since early March, there are indications that some people are returning to work as businesses reopen. But unemployment remains at a very high level.
The strong market performance recently has been bolstered by the unprecedented action of Congress and the Federal Reserve (Fed), which have injected trillions of dollars into the economy to help keep businesses afloat and provide emergency income for laid-off workers.
The stock market gains have also come amidst growing signs that the U.S. and world economies are beginning to recover from the pandemic lockdown that closed stores, restaurants and other business around the world.
The S&P 500 was up 19.95% for the 2nd quarter – from 2584.59 at the end of the 1st quarter to 3100.29 at the June close – recovering much of the lost ground from a steep March slump. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)
The total return of the S&P 500 (including dividends) was up 20.54% for the quarter. It is still down 3.08% for the year.
The NASDAQ Index also had a banner 2nd quarter, up 30.63% for the three-month period. It was up 12.11% year-to-date. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)
With most stores and restaurants closed early in the 2nd quarter, retail sales took a precarious fall in April but began to rebound in May. Total retail sales were up 17.7% in May from the previous month but down 6.1% from a year earlier, according to the Department of Commerce retail report issued June 16. Total sales for the March 2020 through May 2020 period were down 10.5% from the same period a year ago.
Automobile sales rebounded in May – up 46.2% from April sales, but were still down 4.7% from a year earlier. Electronics and appliance stores also began to recover in May, up 50.6% from the previous month, but still down 29.9% from a year earlier. With many bars and restaurants reopening, food services and drinking places were up 29.1% from the previous month, but still down 39.4% from a year earlier. Non-store retailers (primarily online) continued to benefit from the effects of the pandemic as more consumers turned to the internet to make their purchases. Sales were up 9.0% from the previous month and 30.8% from a year earlier.
The U.S. economy gained an unexpectedly high 4.8 million jobs in June, driving down the unemployment rate from 13.3% to 11.1%, according to the Department of Labor Employment Situation Report issued July 2. However, a higher than expected 1.4 million workers filed for unemployment benefits for the first time during the previous week.
The number of unemployed individuals declined by 3.2 million in June to 17.8 million. That is still 12.0 million more unemployed than in February, and the unemployment rate is 7.6% higher than it was in February. According to the report, “these gains reflect a partial resumption of economic activity that had been curtailed due to the coronavirus pandemic in April and March, when employment fell by a total of 22.2 million in the two months combined.”
The biggest gains came in the leisure and hospitality industry, up 2.1 million jobs, the retail trade, up 740,000 jobs, and education and health services, up 568,000 jobs. Average hourly earnings fell by $0.35 to $29.37.
All 11 sectors of the S&P 500 made gains in the 2nd quarter, led by the Information Technology sector, up 30.53%, Materials, up 26.01%, and Communications Services, up 20.04%.
The chart below shows the results of the 11 sectors for the past month and year-to-date:
The yield on 10-year U.S. Treasuries stabilized in the 2nd quarter after a precipitous decline in the 1st quarter. The yield decline was attributed to two significant cuts in the Fed funds rate by the Fed and to an increase in bond demand as investors sought a safe haven amidst the market turbulence. The yield on 10-year Treasuries, which ended 2019 at 1.92%, dropped to 0.68% at the end of the 1st quarter and ended the 2nd quarter at 0.65%. That is up slightly from its April close of just 0.62% – the lowest yield since the government began offering bonds in 1790.
Corporate earnings projections have fallen sharply amidst the COVID-19 crisis. The 12-month forward earnings projections for S&P 500 companies dropped 12.35% in the 2nd quarter. For the year, projected earnings are down 18.42%.
Contributing to that decline were a variety of industries that have been affected by the slow-down, such as oil, retail, sports and entertainment, food and hospitality, autos, airlines, and banks. However, the decline in projected earnings began to flatten over the past two months as more businesses began to reopen.
As stock prices began to rebound, the forward S&P 500 price-earnings ratio (P/E) moved up significantly– from 15.43 at the end of the 1st quarter to 21.72 at the end of the 2nd quarter. That’s the highest level since 2002. However, the P/E could move back down if earnings projections begin to recover.
As stock prices climbed during the past quarter while projected earnings declined, the forward 12 months earnings yield for the S&P 500, which is the inverse of the P/E, began to decline. It ended the 2nd quarter at 4.68%, which is down significantly from 6.60% at the end of the 1st quarter. The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields. The yield remains significantly higher than the 0.65% rate of 10-year U.S. Treasuries.
The Euro dropped 2.36% versus the dollar in the 2nd quarter, as the pandemic affected economies across the globe. Year-to-date, the Euro has dropped 0.06% versus the dollar. The dollar was down 0.06% versus the Yen in the 2nd quarter, and it is down 0.73% versus the Yen for the year.
Oil prices rallied off historic lows in the 2nd quarter, as oil-producing countries cut production and drivers began returning to the road, which helped narrow the wide gap between supply and demand. West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, surged 91.75% in May, from $20.48 at the end of the 1st quarter to $39.27 at close of the 2nd quarter.
Amidst the economic uncertainty of the pandemic, gold prices continued to climb through the 2nd quarter. After closing the 1st quarter at $1,596.60, gold prices moved up 12.77% in the 2nd quarter to close the month of June at $1800.50.
As businesses around the world began to reopen, the global stock market continued to rebound in the 2nd quarter from a significant drop in March. The MSCI EAFE Index, which tracks developed-economy stocks in Europe, Asia and Australia, was up 14.17% in the 2nd quarter, although it is still down 12.59% year-to-date.
What’s ahead for the economy? See the 3rd Quarter 2020 Market Outlook: What Has Been Driving the Recent Market Recovery? by Mark Simenstad, Chief Investment Strategist, Thrivent
Media contact: Samantha Mehrotra, 612-844-4197; samantha.mehrotra@thrivent.com
All information and representations herein are as of 07/02/2020, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.
Past performance is not necessarily indicative of future results.
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