During the second quarter, US equities recovered significantly from the March lows. In fact, the recovery in the US has been the fastest in market history, outperforming non-US developed markets and emerging markets. Small-cap stocks outperformed large caps and value stocks underperformed growth across all markets.
The rapid recovery in the US has left valuations well above historical averages and valuations over the upcoming year may continue to look high given the unusually sharp decline in earnings. Some international economies, particularly the Asia-Pacific region, have experienced less dramatic downturns. While both US and international stocks sold off at the height of the crisis, the valuation gap that persisted through the recent expansion continues to persist today, suggesting that diversification across economies remains an important portfolio strategy.
It is impossible to divorce the recent rally in equity and credit markets from the flood of money from the Fed and the government’s multi-trillion dollar fiscal stimulus. In addition to the impact of this unprecedented injection of liquidity on rising P/E multiples, there is a legitimate concern that investors are pricing in a more rapid recovery that what is happening. However, this may be at least partially explained by a search for return that no longer exists in cash and bond yields.
Despite the rebound in capital markets, the economic, labor market, and earnings recoveries will likely take much longer. The potential for a resurgence of the virus and the upcoming November election present additional risks.
Throughout the crisis and the recovery, one theme has remained clear: Investors with a financial plan and a portfolio that is aligned with their risk tolerance have found it much easier to “stay the course”.
At the close of every previous commentary, I’ve urged you to work with your advisor to have a plan in place. If you haven’t done it yet, now is the time. Please feel free to contact us.
View our Q2 2020 Market Review.
J. Brent Everett
Chief Investment Officer
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