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July 2020 Investment Commentary

The sharp financial market rally that began on March 23rd carried through much of the second quarter.  As the table shows, all asset groups benefited, and equity categories were able to trim steep first quarter losses. Client portfolios, having stayed the course, participated well.  COVID-19 continued to wreak havoc, adding to the scale and breadth of human tragedy worldwide, and case curves even turned back upward in the U.S., but it was taken more in stride.  This was helped by progress, and positive thinking, on the therapy and vaccine fronts.  Faith in the Federal Reserve and chair Jay Powell, and hopes for a continuation of massive fiscal support, remained intact.

  Second Quarter Year to Date  Five Years (ann.)
World Stocks 19.2% -6.3% 6.5%
S&P 500 20.5 -3.1 10.7
Emerging Markets 18.1 -9.8 2.9
Developed International Stocks 14.9 -11.3 2.1
Global Bonds 3..2 3.5 3.7
Commodities 5.1 -19.4 -7.7

Historically sharp economic pain characterized most readings in April, as widely expected, and then signs of recovery began to emerge, in this case with an element of surprise in their quickness.  Notably, after a mind-boggling loss of 20.5 million jobs in April, 2.5 million were gained in May, defying dire forecasts.  Retail sales and consumer spending have snapped back, as have pending home sales.  In many countries, Purchasing Manager Index (PMI) readings on the service and manufacturing sectors rallied off steeply contractionary levels.  While still fairly deep in the valley, investors shifted their focus to the possibilities of recovery and higher ground.

It has been a remarkable six-month stretch, historic in the magnitude and speed of the market’s swings.  On March 23rd, the S&P 500 was down 30.4% on a year-to-date basis.  Then, thanks to a 43.8% rally, it had reached positive year-to-date territory, +0.9%, by June 8th, before backing off in the quarter’s final three weeks.  More recently, we’ve had to come to grips with some hard COVID realities, and in the U.S. in particular.  The next several weeks should say a lot about whether reopening rollbacks, occurring now in several states, could prove extensive enough to thwart an economic recovery that is expected both over the second half of this year and over the next two years.   

The current state of the viral spread is sobering.  On April 1st, the date of our last letter, deaths stood at 4,102 in the U.S. and 44,156 worldwide.  Today, the Real Clear Politics Coronavirus Tracker has those respective figures at 130,123 and 514,622.  The University of Washington Institute for Health Metrics and Evaluation’s Murray model obviously was optimistic in its mid-April projection of 61,000 U.S deaths.  The number has recently been revised to 146,000 lost by October 1st with masks, and 179,000 without. The Murray group also projects most other countries individually without offering a global projection, but the most populous and afflicted add up to around 850,000 by October 1st.  For context, there were as many as 575,000 lost worldwide in the 2009 H1N1 swine flu, with the U.S. accounting for about 12,500.

The U.S.’s comparison to other countries and regions, in terms of new cases, has become progressively less flattering. While most Asian countries have led the class in their handling of the outbreak from early days, Europe, after initially taking the brunt, has battened the hatches effectively as well.  Using a N.Y. Times database that tracks average infections per 100,000 people on a trailing 14-day basis, the E.U. recently registered 16.  Meanwhile, the corresponding figure for the U.S. was 107, which is more in the ballpark of other now-struggling countries like Russia (80) and Brazil (190).  Our infection status now threatens to affect travel and commerce, including a July 1st continuation of European restrictions on U.S (and Russian and Brazilian) entry, with many other countries granted relaxation.

Economically, there are indications that we’ve already begun to recover from an April low point, subject of course to setbacks tied to COVID. In the U.S, Europe, Japan and Australia, recent PMI readings, which are pan-nationally scaled with 50 the dividing line between contraction and expansion, saw June recoveries generally from the grim 30 neighborhood to the upper 40s.   For this year, the IMF is projecting a global GDP decline of 4.9%, followed by a recovery of 5.4% in 2021.  This incorporates a U.S. GDP drop of 8.0% this year and 4.5% recovery in 2021, with corresponding figures of -10.2% and +6.0% in Europe and +1.0% and +8.2% in China.  In most countries, the second quarter is expected to be sharply negative, including down perhaps 30% in the U.S, but with growth resuming by mid-upper digits in the third and fourth quarters. 

This type of recovery assumes continued aggressive fiscal and monetary support.  There is an expectation that various elements of the CARES Act will be extended beyond their July 31st expiration date, including unemployment benefits, with some 20 million workers still sidelined, with re-opening plans paused in several key states, including California, Texas, and Florida, and with an election just four months away.  On the monetary side, Fed chair Powell has pledged open-ended accommodation.  The bank’s bond buying tab stood at $2.9 trillion for the mid-March to mid-June period, spanning most security types, recently including individual corporate bonds.  By comparison, in the first two years during and after the Global Financial Crisis, the program totaled $1.4 trillion and included only Treasuries and mortgage-backed securities.  Moreover, Powell’s June commitment to keep policy rates at 0-.25% through mid-2022 is unprecedented in terms of length, and speaks to the steepness of the challenge.

With infection curve up-turns creating potential shackles on economic recovery, the vaccine watch carries great weight.  The summer months will be key, with about a dozen main developers moving at full speed, including Moderna, Johnson & Johnson, Pfizer, AstraZenica/Oxford University and several Chinese entrants, and broad-based human trials underway. Efforts to speed what is normally a painstaking process include consideration of controversial “human challenge” trials, in which healthy people are vaccinated and then deliberately exposed to the virus.  Tens of thousands have already volunteered and the World Health Organization has issued ethical risk/reward guidelines, but this is still formative.  Further, China has just approved a vaccine from CanSino Biologics for use by its military. Dr. Anthony Fauci and other authorities feel an early 2021 vaccine for wide use is realistic, but this is not certain, and the process will test investors.

As expressed in our writings since March, we have not counselled a move out of stocks.  While acknowledging that we are indeed in a crisis that is unprecedented in nature and scale, and also having expressed some displeasure at the U.S. response, our view has generally been that investors will look ahead.  Promising investment themes around new ways of operating during and after COVID also would be sure to develop.  As the third quarter begins, there will be near-term news cycle headwinds, a compelling (to say the least) election looms, and volatility is sure to persist, but we generally maintain these views.  Stocks are fully priced at a bit more than 20 times typical next-twelve-month earnings forecasts, the latter unusually lacking in visibility. But market timing can prove ill-advised, and we prefer to take the longer view, more aligned with the time horizon of the investment mission for most clients and foundations.

More specifically, as part of our normal quarterly practice in the guideline/model portfolios, we are rebalancing positions on July 1st, as we did on April 1st.  This effectively means trimming stocks on relative strength this time around, after adding to stocks on weakness three months ago.  Also, we are selling a hedged manager and deploying the proceeds into a combination of cash and a flexible-mandate, absolute return-oriented bond manager.  This provides added defense with the unusually elevated cash position and continuation of a multiyear add to the bond allocation, which provides some offset to the maintenance of full long-only equity exposure.

The upcoming months will be anything but dull, and we will be back as needed and as events dictate.

Hopefully, all of you are finding ways to navigate this unusual and difficult year.  There will be better days.

Finally, we appreciate your trust and are always on call if you have questions or concerns.


David S. Beckwith, CFA

Managing Director & Chief Investment Officer


This letter may include forward-looking statements.  All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”).  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.