June 2020 Market Commentary

By Brian Johnson, Viridian Chief Investment Officer and Shareholder

June 1st, 2020

Summary:  Markets appear to be decoupled from the economic realities that we face. The bear market in the Dow from February 12th to March 23rd, 2020 was swift and sharp, but appears to be over for the time being.

The month of May was marked by continued disparity between equity (stock) performance and the economic realities faced by millions of people in the United States and around the world: job losses; retail closures; and health concerns related to the COVID-19 pandemic.  In fact, since mid-March, more than 40 million U.S. jobs have been lost, equating to a headline unemployment rate of roughly 20%, as much of the U.S. and the rest of the developed world remains under some form of “sheltered-in-place” restrictions.  Meanwhile, the stock market is undergoing a massive rebound, with many of the favored growth stocks of our era reaching new all-time highs. Indeed, this coronavirus has served to accelerate the transition from basic industries towards software and technology, and those types of stocks have been notable beneficiaries.

Domestically, U.S. small cap (i.e., smaller company) stocks, fueled by an increased optimism that the economic damage from COVID-19 will be mitigated by trillions in government aid and Fed stimulus, moved higher by almost 12% for the month. The S&P 500 Index, which represents U.S. large cap (large company) stocks, gained roughly 8% in May.  Internationally, developed country stocks, as represented by the MSCI EAFE Index ETF (symbol: EFA), rose by 10% in May, and emerging market stocks, as measured by the Vanguard FTSE Emerging Markets ETF (VWO), moved higher by 8%. U.S. Treasuries, as measured by the Vanguard Intermediate-Term Treasury Fund (VFITX), traded relatively flat, moving slightly higher (+0.31%).[1]

The chart below shows the length and percentage loss of all 37 cyclical bear markets experienced by the Dow Jones Industrial Average (“the Dow”) since 1900.  This year’s decline (highlighted in yellow) lasted from the February 12th high to its March 23rd low.  Ned Davis Research calculates that this decline (roughly 37%) was not only the briefest in 120 -years, but ranks in the top third in terms of magnitude (percentage decline).  Most major market declines are foreshadowed by data, such as weaker corporate earnings or economic data, but this plunge was sudden and had a clear single cause, as few imagined the extent COVID-19’s impact until it was upon us.  

Thankfully, massive government and Federal Reserve intervention (to mitigate the economic impact of unprecedented nationwide shelter-in-place orders) enabled U.S. markets to rally off those March 23rd lows.  That rally has been strong and sustained enough to now suggest that, at least in the near term, the odds of retesting (revisiting) those lows are quite low, even if we see some resurgence in COVID-19 cases and deaths. The market trend is solidly higher and, as United Income notes in their June Update to clients, investors are showing signs of optimism and hope. Consumer sentiment unexpectedly rose in May and, of the 95% of companies in the S&P 500 that reported first-quarter earnings, 64% exceeded average analyst expectations.  The unpredictable nature of COVID-19 will undoubtedly cause continued volatility in the months ahead, but the outlook is far from bleak.

As always, we are here to help. If you have any questions or if you have experienced a meaningful change in your lifestyle or goals that might warrant reviewing your investment allocation, don’t hesitate to contact your Viridian advisor.  We are available and happy to talk with you—either over the phone or via several popular video conferencing solutions.

[1] Source data: Koyfin

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