2020 has definitely been a year to remember…or maybe one to forget? On one hand, we saw the S&P 500 experience its fastest 30% decline in history, only 22 trading days, during the first quarter. The initial headwinds encountered at the beginning of the year involved a trade war between the U.S. and China. Then rumblings arose about a new virus ravaging China, and we learned these “initial headwinds” would only appear as a slight breeze once March hit. The U.S. was smashed on two sides in what we call a major Black Swan event. On one side, we had a price war between Saudi Arabia, Russia, and the United States. In an effort to prevent American oil producers from increasing their already significant market share in the industry, the two countries began ramping up production, causing prices to plummet. The thought was that these high-cost American producers would suffocate in such a low price environment and be forced to exit the industry. On the other side, COVID forced many cities and states to lockdown, which led to a critical halt in economic activity. These nightmare situations culminated in a March 16th drop in the DJIA of 2,997.10, the largest single-day point drop in history. These massive daily drops left investors wondering how far this would go and if we could ever recover. Unknown at the time, the market bottomed a few days later, and though the news kept worsening, the case counts skyrocketed, and cities shut down, the recovery began…and boy did it.

In the midst of all the news above, one would expect a decline to continue. With the economy contracting 32.9% in Q2 and with July 30th jobless claims continuing to rise above 1.43 million, how could equities thrive? Well, if there is one thing that is clear, the market can make even the smartest people look like fools. After the 30+% sell off in the span of a month, the S&P recorded its best quarter since 1987, gaining over 20% in that three month span. As of July 31st, the S&P is actually flat, erasing all losses experienced in March. However, it is misleading to say we have completely recovered. The market is in a bifurcated state at the moment, with the disparity between sector returns near all-time highs. As of July 29th, Tech was up over 17% while energy and financials were down ~37% and ~20% respectively. It is important to note, the largest five members in the S&P 500 account for ~20% of the market cap. Thus, this “recovery” has been slightly misleading because these five (MSFT, AAPL, AMZN, FB, GOOGL) have had phenomenal years, bolstering returns for the index. Most importantly, we cannot overlook the action taken by both the government and the Fed. Not only did the government pump in over $3 trillion in stimulus packages, but the Fed also greatly extended its balance sheet, purchasing corporate and municipal bonds and partaking in direct business lending. They are constantly pulling strings to lessen the blow and artificially prevent a significant economic contraction, and it is clear they will continue to act until the turmoil clears. They always say: “don’t fight the Fed.”  Whether we are out of the woods completely is yet to be known, but it is clear investors are beginning to regain confidence in this economy, and there may be a light at the end of this tunnel. 

This second quarter market recovery by no means signifies that all danger is behind us; a number of risks still remain, leaving us to believe volatility will be very present over the next 12 months. Between the upcoming election, escalating geopolitical tensions, a potential second wave of the virus (which it appears we are seeing now), and potential setbacks in vaccine developments, there is no shortage of volatility-inducing catalysts. 2020 has already seen 2.5x more volatility than the average over the last ten years, and there is no reason for that to stop now. Though these risks require investors to proceed with caution, there are still potential areas of opportunity. If the market is to fully recover, momentum will need to be generated around the 2020 laggards, such as the financials and industrials sectors. The last few weeks has seen some sector rotation, which could be viewed as healthy. Though the outlook for the rest of the year is relatively flat, there are still plenty of opportunities for long-term success. 

Stay safe and stay cool,

John Webb 

Financial Advisor 
Pinnacle Asset Management 
Raymond James Financial Services 
Kidd Private Wealth Group