Global markets staged a remarkable rebound in the second quarter after suffering a pandemic-induced bear market in March. Over the past several weeks, many economies and businesses have slowly begun to reopen. US unemployment and consumer spending hit bottom in May and have since reversed course following the worst economic conditions since the Great Depression. Investment markets, while volatile, appear cautiously optimistic that businesses and economic activity can survive until COVID-19 treatments and vaccines become available. Underpinning the market’s optimism are massive global fiscal and monetary stimuli totaling 28% of world GDP. Additional US federal emergency spending legislation is likely, particularly given the recent acceleration of diagnosed infections in over 30 states.
Past recessions have typically resulted from a sharp rise in oil prices, inflation, or financial imbalances that trigger an increase in interest rates. The current recession, in contrast, has been 100% pandemic-related. In February, world governments essentially put their economies into a medically-induced coma with the goal of slowing the viral spread. Stock valuations responded by falling over 30% in just six weeks. By late March, stocks began a sharp but volatile recovery. For the second quarter, US stocks produced a 20.5% return, and ended the quarter just 7% off last February’s record high. International developed and emerging market stocks rose 15.1% and 17.3%, respectively, in the quarter.
The peak-bottom-recovery cycle progressed far more rapidly for bonds than for stocks. US bond values peaked in early March, bottomed in mid-March, and recovered by early April. This accelerated cycle is directly attributable to the Federal Reserve Bank’s aggressive actions including slashing short-term interest rates to near zero, buying more than $2 trillion in Treasury and mortgage securities, and promising to lend trillions more to support businesses and state and local governments. The Fed has provided repeated assurances that it will do whatever is necessary to stabilize financial markets and backstop lenders and borrowers. In the second quarter, US taxable bonds and tax-free municipal bonds were up 2.9% and 2.7% respectively.
Despite rebounding stock and bond markets, the global economy is far from being out of the woods. As of this writing, almost 40 million Americans are unemployed; 2.6 million have been infected by the virus; and over 127,000 have lost their lives in the US due to COVID-19. Many questions remain unanswered about the virus’ spread, testing, treatment, and ultimate vaccine development. Economies, businesses, and individuals may require additional government and central bank support before the pandemic ends. We acknowledge that many variables lay outside our control as investment managers. However, since the pandemic began, we have taken thoughtful and decisive measures where we can exercise control. These measures include reassessing risk profiles, aggressively harvesting tax losses, rebalancing portfolios, diversifying holdings, and providing frequent economic and market updates.