It is rare that back to back quarters are completely contradictory for investment markets. But, this is 2020, the tale of two quarters. During the first quarter markets were hit by a global pandemic and global economic shut down, decimating markets. This was followed by massive government stimulus and reopening of economies that led to a welcomed snap back rally for global markets. This rally included the best 50-day performance (ending June 2nd) in the history of the S&P 500 with a return over 37%.
With so much change and uncertainty, why did the equity markets bounce back so rapidly? As we discussed in the last quarter’s commentary the stock market is a “leading indicator” of economic activity. It is pricing in all “future” cash flows for companies. It is clear the focus of investors, based on valuation, is not on the immediate future given this dramatic market move. For example, the S&P 500 forward 12-month Price to Earnings ratio (P/E ratio) sits at an elevated level of 22 vs a 25-year historical average of 16.4. What this is telling us is that the market expectation is a deep two quarter recession, followed by a recovery beginning in the 2nd half of 2020 and accelerating in 2021. If this is the case, as we highlighted in the last quarters’ commentary, March 23rd could be the low for equity markets this cycle.
Following the strong 2nd quarter there will be many challenges ahead for the economy. As the fall quickly approaches, school districts around the country are actively planning for the upcoming school year, deciding between a virtual, in-person, or hybrid model. At the University level these decisions are being made as well. Colleges such as Harvard have already decided on a 100% virtual model for the academic year. These decisions will have significant impacts on working parents around the country. At the state level, governors are making difficult decisions on how fast to reopen businesses. Corporations and small business’ around the country are trying to determine when and how to get their employees back to the office. The truth is, until a vaccine is successfully discovered, tested and distributed, all of these decisions will remain challenging.
2nd QTR 2nd QTR(Ex RE) 1YR 3YRS 5YRS
Stable Income 4.6% 5.9% 2.4% 3.3% 3.3%
Conservative Income 8.0% 9.3% 2.0% 4.1% 4.0%
Traditional Pension 13.1% 16.3% 1.6% 5.3% 5.2%
Equity Oriented 14.9% 20.3% 0.1% 5.4% 5.2%
NERT Model Allocation – Choices for every investor
The NERT model allocations are designed to help participants build diversified allocations to capture the major market sectors and a variety of management styles. They are offered to aid typical participant needs for diversified, risk-adjusted allocations. NERT rebalances allocations on a regular basis attempting to keep a consistent risk and asset posture. The allocations will maintain some exposure even in under performing classes. Diversification, by definition, means not all assets can have positive performance every period. The NERT model allocations are designed to allow any investor to participate in proven ways to reduce risk and improve returns over longer periods.
As communicated in April, given the current limitations on withdrawals from the Principal U.S. Property Fund, we created model allocations that removed the Principal U.S. Property Fund. The quarterly return for these new allocations is listed above as 2nd QTR (Ex RE).
Andrew Casteel, CIO, CFP
Acorn Financial Advisory Services, Inc.