The second quarter saw stocks roar back from March losses. Global shares rose 38%, and high yield corporate bonds rose 20%. Long-term Treasury bonds were flat, and gold was up 15% (chart, below). The rally began after global stocks fell by one third from February 19 through March 23 as COVID-19 spread outside China, and shutdowns began. Since March 23, markets focused on measures taken to deal with the pandemic and its effects on the economy. A $2.2 trillion stimulus package and extraordinary central bank actions triumphed over fear and uncertainty. Volatility reigned throughout the first half of this year.

But as the rally unfolded on stimulus measures, the economy entered a severe downturn. Growth plunged, and the Federal Reserve Bank of Atlanta’s GDP Now model indicated the economy was contracting by more than 50% by early June, measured at an annualized pace. Some improvement is now evident following a partial reopening of the economy, and the rate of estimated decline now stands closer to 35%.

Yields Plunge

Closely mirroring the slide in the economy is the slide in corporate profit expectations and Treasury yields. Rising stock prices and a weakening profit outlook drove the earnings yield for stocks off a cliff (chart, below), following right alongside a similar dive in Treasury yields. With both of these yield measures at record lows, it is reasonable to expect lower portfolio returns ahead.

Mixed Messages

The market for safe U.S. Treasuries seems to be pointing to weakness and accommodation ahead, given the ultra-low and ultra-flat yield curve. In contrast to bonds, the stock market’s second-quarter run-up appears to point to strength and growth. The tension between these opposing views should resolve in the coming months as the crisis continues to play out. Critically, progress toward a vaccine or therapy for COVID-19, along with continued safe “reopening” measures, will strongly influence which view prevails. Upcoming elections will also play an essential factor.

To help track the data, we look to higher frequency indicators alongside our regular monthly data review. The Federal Reserve Bank of New York’s Weekly Economic Index (WEI), for example, tracks several weekly signs of real economic activity such as steel production, retail sales, and electricity demand. The WEI plunged from mid-March through early May, but trends have been on a gradual rise since. We also track mobility data on driving, riding, and walking activity nationwide (chart, below). These trends are even climbing.

The high-frequency data follows the broad contour of our monthly WCA Fundamental Conditions Index (chart, below). Following recent trends, our three-month ahead forecast envisions continued gradual improvement.

Fluid Situation

Events of the last few months are without any easy precedent. The bond market seems to be taking a more circumspect view of growth from here while stocks are, for now, seeing a more positive outcome. We are looking to trends in the data to lead our conclusions as the situation remains fluid. We believe a tactical approach to evolving conditions remains warranted.

Kevin R. Caron, CFA
Senior Portfolio Manager

Chad Morganlander
Senior Portfolio Manager

Matthew Battipaglia
Portfolio Manager

Steve Lerit, CFA
Senior Risk Manager

Paul Clark, CFA
Senior Portfolio Manager
Municipal Fixed Income

Rick Marrone
Senior Portfolio Manager
Municipal Fixed Income

Daniel Urbanowicz
Senior Portfolio Manager
Municipal Fixed Income

Suzanne Ashley
Internal Relationship Manager

Eric Needham
Director, External Sales and Marketing

Jeffrey Battipaglia
External Sales and Marketing


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