Investment Review for Second Quarter 2020

The expansion has ended. 

It’s official; the Business Cycle Dating Committee determined that a peak in monthly economic activity occurred in the U.S. economy in February 2020. The peak marks the end of the expansion that began in July 2009 and the beginning of a recession. The expansion lasted 128 months, the longest in the history of U.S. business cycles dating back to 1854. The previous record was held by the business expansion that lasted for 120 months from April 1991 to March 2001.

Major asset class returns.

Risky asset rebound.

Risky assets suffered deep losses early in the year when the effects of the Coronavirus began to present themselves. From January 1 through March 23, global stocks declined more than 30% but varied greatly by company size and geography, with some categories falling more than 40%. Other risky assets such as real estate and infrastructure also suffered substantial setbacks.

As the anticipation and implementation of massive stimulus efforts took hold, risky assets reversed course from March 24 through June 30. While the rebound was substantial, it was not sufficient to recoup earlier losses. As such, global stocks ended the quarter down 6.3% for the year.

Sentiment.

Consumer confidence fell sharply when concerns about the virus mounted; businesses began to reduce headcount, and the general level of economic activity slowed. Small business sentiment also declined but would likely have been much more pessimistic if not for significant stimulus efforts (such as payroll protection program) that provided assistance to small businesses. In both cases, a small ray of optimism can be seen in the most recent readings as both indicators moved up slightly from their lower levels.

Money market yields plunge.

This time last year, money market yields were above 2%.  With the Coronavirus pandemic taking its toll on the economy, the Federal Reserve has come to the rescue with numerous programs and initiatives to help the economy, but they come at a cost.  Today money market rates are at or near zero, a challenging environment for conservative investors.  Even if an investor is willing to tie their money up for 10 years or more, there is still very little return available.

Real estate.

Traditional retailers have found it difficult to compete with online merchants for quite a while. Dozens of companies entered bankruptcy before COVID-19 and many more since. The situation is dire for landlords as rents remain unpaid and empty store fronts depress values of malls and plazas.

U.S. publicly traded real estate was down over 20% for the first six months of 2020. The numbers are much worse, for hotels (-50%) and retail properties (-45%). Office buildings are also starting to feel the pinch as businesses begin to reconsider their needs and how much space will be necessary in the post COVID-19 environment.

In contrast, residential and self-storage properties are doing better than average, while industrial properties are positive year-to-date. In part, this last group has been helped along by e-commerce warehouses and data centers that have benefited from recent trends.

Is more stimulus on the way?

The Federal Reserve has committed to significant monetary stimulus for the foreseeable future. Monthly purchases of roughly $120 billion of treasury and mortgage backed securities will be used to support the flow of credit to households and businesses and to sustain smooth market functioning. In addition, interest rates are likely to remain near zero for a while. In fact, the Federal Reserve is “not even thinking about thinking about raising rates.”

Fiscal stimulus is a little less certain. The popular $600 per week extended unemployment checks are unlikely to continue. The generous benefits have made it difficult for some employers to call back employees or find new workers when individuals can collect $2,400 (plus state benefits) per month without working. In contrast, there is potential for a large infrastructure spending bill and incentives surrounding “Buy American, Hire American.”