Following the S&P 500’s 1st quarter drop of 35%, from peak to trough, markets staged a major comeback in the 2nd quarter as governments around the globe added unprecedented fiscal and monetary stimulus to support businesses and consumers during the COVID-19 lockdown. For the quarter, investors looking through the pandemic and anticipating the recovery pushed the S&P 500 Index up 20.5%, the Russell 2000 up 25.4% and the MSCI EAFE up 14.9%. While these gains were impressive, they only partially offset the losses experienced in the 1st quarter and, as a result, equities remained in negative territory through the first half of the year, with the S&P 500 down 3.08% the Russell 2000 down 9.13% and the MSCI EAFE down 5.1%. However, given the extent of the economic damage wrought by the lockdown, the markets’ bounce back has been impressive.
Volatility remained high, resulting in the reversal of our dynamic hedging strategy midway through the quarter as the markets began their rise, and then the reimposition of the dynamic hedge as markets fell from their peak as the quarter drew to a close. Some of the market’s euphoria was lost as COVID-19 cases around the globe jumped when governments started ending the lockdowns. This increase could push out the economic recovery.
Interest rates remained low throughout the quarter, but the curve steepened as short-term rates declined but long-term rates increased. Consequently, high quality bonds produced single digit returns. More volatile high yield and emerging market bonds staged double digit rallies but, like stocks, remain underwater for the year.
Oil continued its recent roller coast ride and surged higher by quarter’s end as producers agreed to production cuts. As a result, oil prices rose over 100% from their April lows; however, even this rise could not overcome the effect the economic decline has had on most other commodities. For the quarter, commodities as a whole gained 5.5%. Other real return strategies, like real estate and infrastructure, experienced more impressive double digit increases.
Absolute return, or risk management strategies, whose returns are independent of traditional stocks and bonds, continued to lower portfolio volatility. Returns, however, were mixed with single digit positive and negative returns.
The market’s anticipatory nature has looked through the current economic carnage, but the surge in the bounce back should be met with caution. Given the lack of clarity as to when the pandemic will end and how soon economies will recover, we expect volatility to remain high for the foreseeable future.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Rick Cloutier, PhD, CFA is the Chief Investment Strategist for Washington Trust Bank with over 25 years of portfolio management and investment experience. He is responsible for directing the portfolio management, research, and trading activities for the bank’s multi-asset class strategies. He is also responsible for overseeing the client portfolio manager team and portfolio analytics team. Rick has written numerous articles for Investopedia and wrote a weekly column for the Fall River Herald News in Massachusetts. His research has appeared in numerous journals, including the Journal of Investment Management and Financial Innovations, the Journal of Business Management and Economics, and the International Journal of Revenue Management. He provided a nightly commentary on WALE radio and authored the novel Caveat Emptor. Rick earned his BS from URI, MBA from Boston University and PhD from SMC University.