The Coronavirus pandemic caused the largest US economic contraction on record in 2Q and hammered corporate profits. The economy is slowly battling its way into recovery as unemployment declines, manufacturing activity strengthens, and home sales accelerate. Progress has been hampered by persistent increases in COVID-19 cases while governments try to strike a balance between public health safety and economic recovery. Individuals, households, and businesses eagerly await follow-up emergency spending legislation from Congress to widen the safety net and bolster the economy. While Washington politicians struggle for bipartisan agreement in a highly contentious election year, the Federal Reserve Bank continues to provide supportive measures. In August, the Federal Reserve announced its intention to keep interest rates low for the foreseeable future, even if inflation rises above their 2% target.
US stocks staged a remarkable recovery following the pandemic-induced economic shutdown initiated earlier this year. Stocks plummeted 34% from the February high to the March low. The market subsequently rallied strongly and fully recovered by mid-August with help from fiscal and monetary stimulus measures. The entire chapter, from peak to peak, spanned just 126 trading days and marked the fastest-ever recovery from a bear market in US history. The recovery was largely driven by technology stocks, which accounted for the majority of US stock gains during the rally. The tech sector now represents 29% of the US stock market, with Apple, Amazon, Microsoft, Google and Facebook making up most of that concentration. Investors are increasingly bullish on tech companies as more people work from home, shop online, and stream entertainment. For the quarter, US stocks ended the quarter up 8.9%. International developed market and emerging market stocks produced gains of 4.9% and 8.7%, respectively, during the quarter.
Bonds continued their steady ascent in 2Q, spurred by weak economic data and the Federal Reserve’s early and aggressive intervention. Fed measures included cutting short-term rates to near zero, massive purchases of corporate and Treasury bonds, and extending broad-based financial support throughout the economy. Despite low yields, investors continue to be attracted to bonds due to their ability to cushion portfolios in declining or volatile stock markets. For the quarter, US taxable bonds were up 0.6% and tax-free municipal bonds rose 1.1%.
The Coronavirus continues to challenge our economic, political and social structures. Additional fiscal stimulus is necessary to keep the recovery on track, but Congress remains unable to reach an agreement. A highly polarized presidential election, uncontained virus spread, and unresolved US-China relations will likely keep market volatility elevated through year-end. Nonetheless, it’s important to recognize that volatility is normal and markets are resilient. We have structured your portfolio to remain invested during this period of elevated volatility, and subsequently participate in the upside that markets offer over the mid to long-term.