Summary of 2Q/2020: The Market Bounces Back Somewhat

The news of 2Q/2020 continued to be dominated by the coronavirus pandemic. While we are currently experiencing a surge in the number of cases, we have not yet seen a substantial increase in the number of daily deaths across the country as a whole. This could be due to a higher case rate among less vulnerable younger people as well as improvements in our ability to treat COVID-19. In the last two trading days of the quarter, the market shrugged off the bad news emerging from the southern states, where the re-opening is backtracking in some areas.

Regarding the upcoming election, there have been some important developments. First, the prediction markets are now favoring a Biden victory with about a 60% probability. The polling in the five battleground states of Florida, Pennsylvania, Wisconsin, North Carolina, and Arizona has Biden leading in all of them (realclearpolitics.com). The second reversal from Q1 is the 60% probability that the Democrats will capture the Senate (predictit.org), and of course, it is a virtual certainty that the Democrats will maintain control of the House. We have always said that the market prefers divided government over single party control.

In what appears to be the anticipation of positive economic growth, based on a total US market index, the market delivered its best quarter since 1975. Undoubtedly, some credit should go to the multi-trillion dollar fiscal and monetary stimulus. In comparing the returns from Q1 and Q2, we learn an important lesson about the brutal math of investment returns: The US market lost 20.9% in Q1 and gained 22.1% in Q2, so you might expect it to be up about 1% year-to-date. However, it’s actually down 3.4% because a loss of X% requires a gain of more than X% before we are back to the break-even point. For example, a market drop of 20% requires a 25% gain. As for the economy itself, it’s definitely too early to say what letter of the alphabet or mathematical symbol (U, V, W, square root sign) describes the eventual recovery. The economists of Vanguard expect the recession to be short-lived with recovery starting in Q3. However, they acknowledge that it will take at least a decade of steady growth until debt in developed countries returns to pre-COVID levels, and that’s assuming a reasonable level of fiscal discipline. Vanguard also expects continuing disinflation—a slowing in the rate of inflation for the medium term. (Vanguard Market Perspectives, July 2020)

The table below summarizes the estimated returns for various asset classes based on the performance of Vanguard index funds. Please note that they do not represent the returns of the funds or portfolios utilized by Clarity Capital Advisors.

Asset Class           Ticker Used          2Q/2020 Return    YTD 6/30/2020 Return

US Total Market       VTSAX                       22.1%                         -3.4%                         

US Large Growth     VIGAX                        29.0%                        11.3%                       

US Large Value       VVIAX                         12.7%                       -15.4%                                   

US Small Growth     VSGAX                       32.9%                          0.7%  

US Small Value        VSIAX                         20.8%                      -21.3%                                   

International             VTMGX                       17.5%                      -10.8%                                   

Emerging Markets    VEMAX                       19.9%                        -9.5%             

US Real Estate         VGSLX                       13.5%                       -13.9%                      

Int’l Real Estate        VGRLX                       10.2%                       -20.4%                       

US Bond Market       VBTLX                         3.0%                          6.4%                                      

US TIPS                     VAIPX                         4.1%                         6.0%                                      

Source: www.vanguard.com

Rather than the usual large growth segment which was a close second, the leading segment of the US stock market for Q2 was small growth which has over 50% of its capitalization in technology and health care companies. For year-to-date, large growth maintains its healthy lead, buttressed by the giant tech companies Microsoft, Apple, Amazon, Alphabet (Google), and Facebook. We find it absolutely remarkable that the market now considers these companies to be more valuable than before anybody even heard of COVID. Without question, it’s starting to feel like 1999 all over again. Just as they tend to perform worse in a downturn, smaller companies generally outperform in a recovery, and they did not disappoint. On a year-to-date basis, both large value and small value remain negative along with international, emerging markets, and real estate. With the exception of real estate, Vanguard expects all of these asset classes to outperform large growth for the next decade (Vanguard Market Perspectives, July 2020). We agree and have updated our long-term financial planning assumptions accordingly.

At the risk of sounding like a broken record, our advice is to be invested and stay invested at an appropriate risk level, and by appropriate, we mean an asset allocation to meet your goals that you will hold through all different types of markets.