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.


The Washington Crossing Advisors’ High Quality Index and Low Quality Index are objective, quantitative measures designed to identify quality in the top 1,000 U.S. companies. Ranked by fundamental factors, WCA grades companies from “A” (top quintile) to “F” (bottom quintile). Factors include debt relative to equity, asset profitability, and consistency in performance. Companies with lower debt, higher profitability, and greater consistency earn higher grades. These indices are reconstituted annually and rebalanced daily. For informational purposes only, and WCA Quality Grade indices do not reflect the performance of any WCA investment strategy.

Standard & Poor’s 500 Index (S&P 500) is a capitalization-weighted index that is generally considered representative of the U.S. large capitalization market.

The S&P 500 Equal Weight Index is the equal-weight version of the widely regarded Standard & Poor’s 500 Index, which is generally considered representative of the U.S. large capitalization market. The index has the same constituents as the capitalization-weighted S&P 500, but each company in the index is allocated a fixed weight of 0.20% at each quarterly rebalancing.

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