BY: FRANK HOSSE
Director of Investments – Argent Trust Company | 615.385.2720
Stock markets continued their climb higher in May. The impact of the COVID-19 pandemic continued to dominate markets, with an increasing focus on how countries would begin to relax their lockdown measures and how this would affect the economy. Volatility declined and the more moderate market moves compared to April suggest that investors are being watchful of how the situation develops.
For the month, larger-cap U.S. stocks gained 4.8% and smaller-cap U.S. stocks jumped 6.5%. When looking at year-to-date returns, the strong returns since the March lows have masked the sharp drawdown in February and March. The S&P 500 fell 34% from its February high, but since March 23 the index has rallied 36% through the end of May. Larger-cap U.S. stocks are now down just 5% since the start of the year.
Developed international stock markets were in-line with U.S. markets last month, posting 4.4%. France and Germany proposed a €500 billion European Union recovery fund for Europe in May, which the market saw as a positive step forward for the region and a potential kicking-off point for the fiscal integration that the more frugal Northern European countries have long opposed. Meanwhile emerging markets added 0.8% in May. U.S.-China relations started to creep back into the headlines, particularly with China’s approval of a controversial national security law for Hong Kong.
Interest rates have been largely unchanged over the last two months. Since April, the 10-year U.S. Treasury yield has traded in a tight range around 0.7%. U.S. core bonds returned 0.5% in May. Non-core bonds outperformed the safer Treasury market last month. U.S. high-yield and emerging market debt gained 4.4% and 6.1%, respectively.
In the span of just three months we have endured events that echo three very difficult periods in our country’s history: a pandemic (1918), Great Depression–like unemployment (the 1930s), and civil unrest (the late 1960s). Combine those three events and you get 2020.
Reconciling the current macro environment with strong equity market gains can be a head scratcher. Recessions typically entail the correction of imbalances, often associated with excessive demand—whether in fixed investment or consumer spending, or both—that has undermined private sector finances. In contrast, the current downturn is being driven substantially by an enforced pullback in activity in the name of social distancing and virus mitigation. The unique nature of this downturn suggests it will be more dramatic but shorter than usual. However, the pace, strength, and duration of any economic recovery remains highly dependent on the trajectory of the pandemic, which will be impacted by social distancing, testing, tracing, treatment, vaccines, etc., in the months ahead.
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