“Good investors gather information, put that information into current and historical context, then make sound decisions.”
June was busting out all over, with the S&P 500 Index rising 5 of the first 6 days. It climbed as high as 3233, just 5% below the all-time highs last seen on February 19th. But two quiet days were followed by a nearly -6% single-day declineon June 11th, and it was back to the drawing board for the rest of the month. As of this writing, the S&P 500 Index sits at 3009, about 1% lower than where it opened on June 1st. Overall, these are better levels than April and May, and far better than March, but the progress has been interrupted by occasional large single-day declines. They are demoralizing and that’s why even though it’s getting better, it’s not feeling better.
Just as the economy was starting to open up, new COVID-19 cases surged. The U.S. is not having the same experience as European countries that had distinct bell curves in their number of reported cases. While overall mortality is improving, in certain states hospitalizations are increasing. In a recent press conference, the federal task force reported that 500,000 tests were occurring every day. It is sensible that the number of reported cases would increase with a larger population of tests, and State Officials are being compelled to demonstrate an abundance of caution. It does appear that the pandemic will be with us, and in the headlines, through the Summer.
The specter of high volatility in equities can make a compelling case for fixed income securities. This is especially true if financial markets continue to work through trading ranges. These trading ranges can tier and still project higher for the longer term. However, if you are going to own securities that are demonstrating limited price appreciation for several months at a time, the income those securities generate becomes a more valuable component of their total return. Last month we added an additional level of fixed income to portfolios, which has demonstrated to be helpful in managing volatility while adding income.
Large Cap equities continue to set the pace and remain the largest component of our portfolio allocations. Small cap equities have also proved to be constructive. The strongest equity sectors are internet, technology and consumer discretionary, which are all in positive territory for the year. The other sectors that we follow remain in negative territory YTD, albeit in far better positions than in March. Energy and financial sectors, in spite of their impressive rallies from the March lows, are at the bottom of the leader board.
Bond markets are proving to be the beneficiaries of equity market volatility. The Bloomberg Barclays U.S. Aggregate Bond Index is up +6.14% for the year. The Bloomberg Barclays Municipal Bond Index is up +2.03%, while the Bloomberg Barclays U.S. Corporate High Yield Bond Index is down -3.43%. These are not huge numbers, but they do represent a sheltered harbor from the relatively rough waters that equity markets are enduring. That being said, when the U.S. economy resets and election news is on the front page instead of COVID-19, equities are expected to retake the lead as we move into 2021.
Without any doubt, we are living in a sea of change.While it was broadly believed that the COVID-19 pandemic would be running its course by now, it certainly appears that it will be in control for the Summer. Civil unrest also seems to flourish in the summertime, and hopefully positive changes will grab the attention of the media and our politicians. In December of 1776 Thomas Paine wrote, “These are the times that try men’s souls. The summer soldier and the sunshine patriot will, in this crisis, shrink from the service of their country: but he that stands by it now deserves the love and thanks of man and woman.” At that time the United States was a baby in the wilderness, whereas now it is the most powerful economy in the world. We’ll get it figured out.
Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.