“A billion here, a billion there, and pretty soon you’re talking real money.” attributed to U.S. Senator Everett McKinley Dirksen.
The first quarter of 2020 brought a tsunami of events that overturned much of the global economy and brought a sense of chaos to financial markets worldwide. Policymakers responded in a swift and decisive fashion. Senator Dirksen, quoted above, would have had to add another three zeros to what he considered “real money” based on the actions of the Federal Reserve and U.S. Congress. The Federal Reserve has increased its balance sheet by over $2.9 trillion since early March and they have indicated that their purchases of securities will continue for as long as they are needed. The fiscal policy response was equally swift and of similar size – with over $2 trillion in stimulus in addition to over $480 billion in forgivable loans to small businesses. If you had a job that paid you $1 per second you would earn your first $1 million in about 11.6 days. You would earn your first billion after 31.7 years. And after 31,700 years you would be at $1 trillion. U.S. policymakers have authorized a combined fiscal and monetary stimulus of over $5.3 trillion (so far). That is indeed “real money.” And those numbers are for the U.S. alone. Governments around the world have embarked on similar stimulus programs that are equally stunning in their scale and scope.
At least from the perspective of financial markets, policymakers have had positive and dramatic impact. Equity markets continued the rebound that began on March 23. For the quarter the S&P 500 rose 20.54%. For the year the S&P 500 has not quite reached the breakeven point, closing the quarter with a loss of 3.08% YTD. Other broad equity market indices rebounded as well but are still much further away from where they started the year. The Russell 2000 Index (U.S. small-cap stocks) was up 25.41% in the quarter, but its YTD return is a painful -12.93%. International stocks as measured by the MSCI-EAFE Index were up 14.88% in Q2, but -11.34% YTD. As has become an all too familiar pattern, growth stocks once again bettered value stocks, and the degree of separation in performance between the two is remarkable. For the quarter the Russell 1000 Growth was up 27.84%, far outpacing the 14.29% return of the Russell 1000 Value. For the year thus far the contrast between growth stocks and value stocks is even more stark. The Russell 1000 Value’s YTD return of -16.26% is woefully behind that of the Russell 1000 Growth, which has returned 9.81% YTD. And over five years the numbers are jaw-dropping: the Russell 1000 Growth returned a total of 109.04% over the trailing five years while the Russell 1000 Value’s total return was only 25.46%.
Bond markets were much more sanguine in the second quarter than the first. The Bloomberg Barclay’s US Aggregate Index rose 2.90% for the quarter, bringing its YTD return to 6.14%. The Bloomberg Barclay’s Municipal Bond 7-Year Index was up 3.31% in the second quarter and 2.28% for the year. The Treasury yield curve steepened ever so slightly in the second quarter. The short end of the curve fell – the two-year Treasury falling from a yield of 0.23% to 0.16% during the quarter. The 10-year Treasury fell only 4 basis points, from 0.70% to 0.66%, while the 30-Year Treasury yield rose, from 1.35% to 1.41%.
Where we go from here in markets is as big a conundrum as it ever has been. It would seem foolish not to anticipate further volatility, though which direction that volatility might take is uncertain. Volatility often provides opportunity as well as peril, even if that opportunity is something as simple as rebalancing portfolios. Rebalancing portfolios from bonds into stocks, even if only a small amount, in March of this year, would have generated a higher return for investors in the ensuing market rebound. Maintaining a diversified portfolio is not just about owning different types of securities, but about owning exposures to a variety of risks that allow a portfolio’s investments to move in an uncorrelated fashion. Diversified portfolios (or said another way, portfolios whose investments have lower degrees of correlation with each other) allow investors the opportunity to rebalance when markets are disrupted by a particular set of risks that impact one set of investments differently from others. Being balanced in one’s approach, and flexible in one’s thinking, are characteristics that have served long-term investors well in the past, and we expect that to continue to be the case, even (and maybe especially) in these extraordinary times.