2020 Q2 Thoughts

Market Recap

Global equities performed strongly for the quarter. The S&P 500 Index gained an incredible 21% and, as of June 30, is now down only 3% for the year, despite the huge drawdown in March. Developed international and emerging-market stocks gained 17% and 19%.

Enormous levels of money printing and government spending certainly helped the investor mood. Central banks around the world provided unprecedented support to markets and economies. On the fiscal side in the United States, trillions in direct payments and loans have been or are going to be delivered to impacted citizens and businesses. The level of stimulus globally already surpasses by far what was issued during the 2008 financial crisis.

Short-term interest rates are now near zero or negative in most of the developed world. The 10-year Treasury yield fell slightly this quarter but has revolved around 0.7% for some time. Also, investment-grade corporate bond spreads narrowed. Accordingly, core bonds gained another 3%.

Non-core flexible bond funds and floating-rate loan funds, which take on more risk than core bonds but have higher expected returns, rebounded strongly from their poor first quarter performance, meaningfully outpacing core bonds this quarter. Trend-following managed futures funds gave back much of their strong positive returns from the first quarter, as many market trends have sharply reversed since March. The diverse performance of all these investments reflects their beneficial, diversifying roles in your portfolio. Together they work to reduce volatility and improve the compounding of returns over the long term.

Portfolio Update

From the U.S. stock market’s 40% rally since the March 23 low, it seems the market consensus has been confident that the economic recovery will be quick and the virus will be contained soon. The progression of the virus from here will indeed be the key near-term driver of global economies and markets. While it is unlikely to be as sharp and quick as the market expects, we do see an uneven but steadfast economic recovery as the most likely six- to 12-month scenario. We are cautiously optimistic that the resurgence of COVID-19 cases observed in late June and into July will not require the same kind of draconian lockdowns we lived through in March through May. Thus, the second wave’s economic impact hopefully won’t be as bad.

In a sustained reflation from the COVID-19 recession—with a backdrop of very low interest rates and tremendous fiscal/monetary policy support—our equity positions (especially in the economically sensitive areas we favor) and our non-core bond funds should do quite well.

But the successful containment of COVID-19 is not a foregone conclusion. The rise in cases in the southern and western United States, not to mention in several emerging-market countries like Brazil and India, is concerning. Local U.S. authorities have so far refrained from large-scale rollbacks of their reopening efforts. But if strict, widespread lockdowns return, the global economic recovery will be more drawn out, which would be a negative surprise for markets. There are also other uncertainties around the November election or the ongoing U.S.-China dispute that could disrupt financial markets.

Therefore, we should steel ourselves for the possibility of more downside and bad news for markets, the economy, and the virus. Yet The Gardner Group believes our portfolios are prepared for such developments. Despite very low yields, we maintain a healthy allocation to core investment-grade bonds. They are one of the few investment classes that should appreciate if the economic recovery stalls or faces a setback. We can then use them to fund the purchase of growth assets at much more attractive prices, as we did during the equity selloff earlier this year. We stand ready to take advantage of further opportunities the market may offer us.

With The Gardner Group’s portfolios well-diversified and balanced between positive exposure to an eventual recovery and protection against further downside, we see several ways they can generate strong returns looking out five to 10 years.

Partnering With You

Despite our cautious optimism, this is still the time for us to continue shoring up your overall financial plan so you can easily weather any dark times that may lie ahead. We can help you determine or evaluate an appropriate emergency fund, revisit your cash flow projections to ensure you remain on a sustainable path, or update your charitable plan to expand or redirect donations to COVID-19-related causes if you’re so inclined (note, you can now deduct $300 in cash contributions whether or not you itemize).

The Gardner Group can help you take advantage of various provisions of the SECURE and CARES acts. For example, under the CARES Act, required minimum distributions can be waived this year, including those for clients with inherited IRAs. And if you’ve already taken a portion or all of your distribution, we may be able to help you use IRA rollover rules to return any unneeded portion to your account. Roth IRA conversions may also be an attractive tax strategy to consider given rule changes for 2020 and recent market volatility.

It is also the time to seek greater inner strength given the stress and fear we are all feeling. Taking breaks from the daily news cycle and focusing on the physical and mental health of you and your loved ones will go a long way. It’s also important to keep a long-term perspective when investing and stick to your investment plan. This starts with being invested in the right portfolio that’s aligned with your risk attitudes and financial goals. If you have concerns, we are here to help you re-evaluate your portfolio for the long term.

In the face of an uncertain future, we try to remember that, through history, nothing—not even world wars and pandemics worse than the current one—stopped the inexorable rise of markets, economic growth, and progress toward greater equality and freedom, however slow or challenged it may have felt at any particular moment. As a society, we will make it through the crises we face today and come out stronger and more resilient than ever. The Gardner Group helps a select group of families manage their financial affairs. We take risk, asset allocation, cash flow, taxes, and other considerations into account before making any financial planning recommendations.