The month of June was the story of risk-on and risk-off. The alarming rise of coronavirus cases in the United States drove market volatility higher and the headlines helped influence investor risk appetite throughout the month.

The S&P 500 returned 1.99% during the month. Early month declines were followed by mid-month strength as economic indicators still show a significant rebound in the global economy. Small cap stocks outperformed their larger cap peers and growth, led by technology names, bested value. Non-US developed markets and emerging markets were strong during the month as the spread of the virus appears well contained overseas.  

The bifurcated market has been a key characteristic since the sell-off in March. While the Federal Reserve seems quite happy to continue to prop up the bond markets, the equity markets have teetered between risk on and risk off on a daily basis. The market seemed content to look past the rise in new COVID-19 cases and focus more broadly on the rebounding U.S. economy. While many states have put reopening plans on pause, or even reinstated lockdowns in certain areas, the overall trend towards reopening was enough to bolster June non-farm payrolls by 4.8 million, well above the consensus expectations of an increase of 3 million jobs.

In my opinion, the likelihood that states will reinstitute broad lockdowns is low; however, I do think we could see many states dial back their reopening plans or put existing plans on hold for the foreseeable future. The reopening of schools is now a growing debate that is sure to impact the ability of many parents to return to work on a full-time basis. This may mean the strength of any economic rebound will be muted. Initial economic indicators in May and June showed significant rebounding in the global economy, but it is unlikely to maintain that momentum as it is now clear that the fight against the virus is not finished. The developments are quite fluid, and things could certainly change rapidly as we enter July and August. I believe this will cause the volatility of equities to remain elevated and the shift between risk on and risk off will be persistent as news headlines continue to drive market sentiment.

This material was prepared by the Spotlight Asset Group (“SAG”) Chief Investment Officer (“CIO”) and is presented for information purposes only. The views offered are those of the author and are subject to change. This information is not intended to provide investment advice or solicit or offer investment advisory services. All information and data presented herein has been obtained from sources believed to be reliable and is believed to be accurate as of the time presented, but SAG does not guarantee its accuracy. You should not make any financial, legal, or tax decisions without consulting with a properly credentialed and experienced professional. Investing involves risk and past performance is no guarantee of future results.

The positive equity momentum that began in April continued into the month of May. Improving economic data appears to support the thesis that the worst of the economic devastation from the coronavirus lockdowns is behind us. In fact, the most recent data suggests the economic recovery may be much faster than anticipated. This good news, paired with an accommodative U.S. Federal Reserve, has caused a rebound in investors’ appetite for risk. 

The S&P 500 returned 4.76% during the month, building upon the strength of April. For the second month in a row, mid-cap stocks outperformed both large-caps and small-caps. Non-US developed markets performed in-line with the S&P 500 and both handily outperformed emerging markets. Risk continued to be rewarded in fixed income, with another strong month for high yield bonds. 

Across the United States more and more states have begun the reopening process and going into the last weekend of May there appeared plenty of reasons to be optimistic. The most encouraging piece of economic news during the week was the meaningful decline of continuing unemployment claims, the first drop since February. Continued claims fell by 3.86 million, bringing the total number of claims to 21.05 million. This is an important data point as it shows that the gradual reopening of state economies is helping to bring back jobs, albeit gradually. Another positive data point was improving TSA passenger numbers, which rose to 268,867 passengers, up 39% from two weeks ago. While this number is still pitiful in comparison to normal daily travel numbers in the millions, it is yet another sign that Americans are eager to return to some sense of normalcy. 

What seems to be true is that the fastest stock market decline in history has been followed by the fastest recovery on record. While many market prognosticators, including myself, felt this downturn would be prolonged and the impact of the lockdowns on the economy would result in a U-shaped recovery, it is quite evident that this was a V-Shaped recovery all along. The recession that started in March is the sharpest downturn we have seen since the Great Depression.  As it turns out, it was also the shortest.

The outlook for stocks looks promising from here. While I anticipate corporate earnings to be down substantially in the second quarter, it is unlikely that it will be a prolonged dip. As we know, the stock market is forward looking anyway, so I do not expect the bad news to have much impact on the market’s upward trajectory. That said, nothing about 2020 has been predictable and my crystal ball is a bit foggy these days. Our goal is to position our portfolios to “expect the unexpected”, staying cautiously optimistic, while also maintaining appropriate downside protection.

This material was prepared by the Spotlight Asset Group (“SAG”) Chief Investment Officer (“CIO”) and is presented for information purposes only. The views offered are those of the author and are subject to change. This information is not intended to provide investment advice or solicit or offer investment advisory services. All information and data presented herein has been obtained from sources believed to be reliable and is believed to be accurate as of the time presented, but SAG does not guarantee its accuracy. You should not make any financial, legal, or tax decisions without consulting with a properly credentialed and experienced professional. Investing involves risk and past performance is no guarantee of future results.

The old saying goes “April Showers bring May Flowers” and while that might certainly be true for the weather here in Northern Illinois, I’m not convinced it will apply to the stock market, as the economic impact of the global lockdown starts to affect earnings reports in the next few months.

After an abysmal March, April brought positive returns across all major asset classes. The S&P 500 returned 12.82% during the month, recovering significantly from the lows of a month ago. Mid-cap stocks bested both large-caps and small-caps. U.S. markets sizably outperformed their non-U.S. counterparts, and emerging markets beat developed markets by a wide margin. April proved to be a risk-on market with high yield bonds handily outperforming investment grade.

Largely positive April returns are certainly not reflective of the unprecedented economic crisis we are experiencing. The main thought on investors’ minds is whether the market will retest the March lows. Personally, I believe that to be a likely scenario. As states work on their plans to reopen, any indications that the lockdowns will continue through the summer months will not be viewed favorably by the markets. This will be especially true as April economic data offers investors a glimpse into the economic damage being done. Markets like clarity and if a clearer picture does not emerge for how the reopening will unfold, I expect the markets will continue to be volatile.

The next question seems to be is are the markets fairly-valued. Down about 12% from all-time highs does not seem to suggest they are. To date, 55% of S&P 500 companies have reported first quarter earnings. As more companies release their earnings, second quarter guidance has maintained a somber tone. Per FactSet’s recently released Earnings Insight report ¹, analyst consensus estimates for S&P 500 second quarter earnings fell 28.4%, from $36.94 to $26.46. This marked the largest decline in the quarterly EPS estimate over the first month of a quarter since FactSet began tracking this data in the first quarter 2002. The market will need to recalibrate expectations currently reflected in stock prices. This again supports the thesis that continued downside risk remains in equity markets.

The counter argument, of course, is that the Federal Reserve has taken aggressive action in an attempt to buoy the markets. This “reflation trade”, which seeks to reduce risk premiums and reflate risk assets, appears to be having the desired effect. This certainly helps limit the floor for equities, but I still believe downside risk remains.

The counter argument, of course, is that the Federal Reserve has taken aggressive action in an attempt to buoy the markets. This “reflation trade”, which seeks to reduce risk premiums and reflate risk assets, appears to be having the desired effect. This certainly helps limit the floor for equities, but I still believe downside risk remains.

The good news is that the very worst of the economic hit from the COVID-19 driven lockdowns is likely behind us. As more and more states begin to relax restrictions on their local economies, gradual improvements are likely to be seen. This process will be slow and deliberate, but nonetheless a step in the right direction.

¹ FACTSET Earnings Insight May 1, 2020 https://www.factset.com/earningsinsight

This material was prepared by the Spotlight Asset Group (“SAG”) Chief Investment Officer (“CIO”) and is presented for information purposes only. The views offered are those of the author and are subject to change. This information is not intended to provide investment advice or solicit or offer investment advisory services. All information and data presented herein has been obtained from sources believed to be reliable and is believed to be accurate as of the time presented, but SAG does not guarantee its accuracy. You should not make any financial, legal, or tax decisions without consulting with a properly credentialed and experienced professional. Investing involves risk and past performance is no guarantee of future results.