The U.S. economy shrank at a 5.0% rate in the first quarter of 2020, the most recent GDP figure available. The decline reflected only about two weeks of the economic shutdown that began in mid-March. This was the sharpest quarterly decline since an 8.4% fall in the fourth quarter of 2008 during the financial crisis. Economists are forecasting a much larger GDP drop for the second quarter as the entire period was impacted by the economic standstill caused by the pandemic. (Second quarter GDP will be released in late July.) The second quarter figure will likely be on a scale not seen since the Great Depression.
Congress and the Fed remain committed to aggressively supporting the economy until it is on a solid road to recovery. After approving the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March, Congress is working on a second stimulus package this month. The Fed plans to hold interest rates in a range of 0% - 0.25% for as long as they need to. It used its lending powers to an unprecedented degree, lending to support households, employers, financial markets, and state and local governments. The Fed continues to purchase massive amounts of fixed income to ensure smooth market functioning so that credit continues to flow. Its steps to stabilize the credit markets are working. There were numerous other actions taken by the Fed to support the financial market functioning in response to the crisis.
The unemployment rate, which rose from 3.5% in February to 14.7% in April, fell to 11.1% in June as businesses reopened and workers began heading back to work. The week ending on July 11 marked the 16th consecutive week that initial unemployment claims totaled above 1 million. Unemployment levels remain extraordinarily high, with more than 30 million Americans receiving unemployment benefits in July. Consumer confidence for June jumped more than expected as the U.S. loosened stay-at-home restrictions. CPI rebounded in June, driven by the rebound in gasoline and food prices. Economic activity in the manufacturing sector recovered as PMI data showed a strong recovery in May and June after April’s substantial contraction. The housing market remained resilient for the quarter.
The broad U.S. bond market (Bloomberg Barclays U.S. Aggregate Bond Index) increased by 2.9% in the second quarter. All sectors within the index saw positive total returns. After a robust first quarter for Treasury bonds (up 8.2%) as startled investors purchased safe-haven assets, Treasuries returned a modest 0.48% for the current quarter. The yield on the benchmark 10-year Treasury ended the quarter at 0.66%. Emerging market (EM), high yield, and investment-grade corporate bonds had strong returns in the second quarter, jumping 11.2%, 9.4%, and 9.0%, respectively. Treasuries and securitized credit, the largest sector weightings within the index, detracted from relative returns. Mortgage-backed securities (MBS) returned a mere 0.67% for the quarter after increasing 2.8% in the first quarter. MBS experienced heightened volatility caused by the pandemic as investors looked to reduce risk. Help from the Fed, which purchased these and other securities in a broad support program helped to stabilize the MBS market.
The S&P 500 Index rebounded by 20.5% in the second quarter after the sharp first quarter sell-off, dropping 19.6%. The rally was based on positive news of reopening the economy, flattening the curve, potential vaccines, and policy support. Despite the recovery, the index remains off its prior high set on February 19. All sectors reported gains. The strongest sectors in the recent quarter were consumer discretionary, technology, and energy – increasing 32.9%, 30.5%, and 30.5%, respectively. The weakest sectors were utilities, consumer staples, and financials, which were up 2.7%, 8.1%, and 12.2%, respectively. Small-cap stocks rebounded during the period. Growth stocks continued to dominate value by a wide margin. The forward P/E for the S&P 500 increased to 21.7x, above the 25-year average, shrugging off economic and unemployment issues. The recent stock market strength is baffling to many. The expectation of better news (given the stock market is forward looking) explains how it can rebound even though the U.S. is in a deep recession.
International equities rebounded in the quarter but lagged the U.S. markets. MSCI World ex-USA (includes only developed countries) and MSCI ACWI ex-USA (includes developed & EM countries) increased by 15.6% and 16.3%, respectively. EM equities outperformed developed international markets. EM increased 18.2% for the quarter as Latin America recovered some of its earlier losses (falling 46% in the first quarter). EM Asia increased 17.9%. China is one of the only countries with a positive year-to-date return, after jumping 15.3% in the quarter as it recovered from the pandemic. The U.S. dollar weakened somewhat in the quarter, a tailwind for foreign stocks.
The Bloomberg Commodity Index rose by 5% in the recent quarter as energy recovered and metals prices performed well. U.S. crude oil prices nearly doubled from March 31 through June 30, ending the quarter at $39/barrel as global demand began to recover and global supplies continued to tighten. Many believe the rally was excessive given the slow pace of demand growth coming out of the pandemic. Gold prices gained 12.8% during the quarter as a result of the Fed's loose monetary policy also due to the pandemic. The real estate sector jumped 10.1% in the quarter; however, REITs were the second worst performing asset class sector for the year-to-date period, down 19.0%.
