2020 Mid-Year Market Review and Outlook

Review of the First Half of 2020:

The first half of 2020 saw one of the fastest market crashes in history followed by a rapid bounce back that defied many prognosticator’s forecasts. Stock markets around the world fell double digits in the first quarter 2020 (Q1) only to regain a large portion of the losses in the second quarter (Q2.) The table below shows returns for the major indices for the first half of the year.

IndexYear to Date Return Through June 30
S&P 500 (U.S. Large Caps)-3.08%
Russell 2000 (U.S. Small Caps)-12.98%
All Country World-6.19%
International Markets (MSCI EAFE)-11.07%
Emerging Markets (MSCI EM)-9.67%
U.S. Aggregate Bond6.27%

The only index to post a positive return was the U.S. Aggregate Bond Index. The return was mainly driven by the Federal Reserve Bank’s (Fed) intervention in the bond market, including the unprecedented action of buying bond Exchange Traded Funds (ETFs.) The S&P 500 gained 20.54% in Q2 yet ended the first half of the year down 3%. The Europe, Australasia, and Far East Market (EAFE) and Emerging Markets ended down 11% and 9.7% respectively. The All Country World Index, a measure of all stock markets, finished down 6%. It was buoyed by U.S. Large Cap Stocks which account for approximately 60% of the index.

While indexes are often reported on and discussed, they do not show the entire story. Markets are divided into sectors, or a grouping of companies with similar economic characteristics.  The S&P 500 is divided into 11 different sectors. Examining the returns of these sectors reveal a stark contrast between the winners and losers. The two tables below highlight the top and bottom performing sectors.

Top Three S&P 500 Sector Returns
SectorYear to Date Return Through June 30
Information Technology14.95%
Consumer Discretionary7.23%
Communication Services-0.31%
Bottom Three S&P 500 Sector Returns
SectorYear to Date Return Through June 30

Only two of the 11 sectors produced positive results. As populations worldwide were mostly confined to their homes, many individuals and businesses invested in additional technology in a bid to keep operations while working from home. Information Technology and Communication Services continued their strength from 2019 and stayed within the top three sectors. Energy continued its losing streak. Energy has been the bottom performer for 2014, 2015, 2018, 2019 and, now, the first half of 2020. The Energy sector is down 41% since 2014.

Preview of the Second Half of 2020:

At time of this writing, earnings season is just beginning. Company earnings for Q2 will be the first that fully reflect the impact that the COVID virus has had on companies. While past earnings will have some importance in terms of stock price, the company’s guidance regarding expected earnings for Q3 will be more impactful.

We believe areas to avoid going forward are banks and real estate (REITs), especially those with significant mall, commercial property, or restaurant exposure. Banks will be hampered by near zero interest rates and a lack of demand for loans. REITs will face missed rental payments, low occupancy, and lower rental prices. Restaurants will have to manage decreased demand and COVID related restrictions.

Stocks that we think have investable potential are technology, after a pullback, infrastructure plays and targeted energy companies. Technology has been on a tear for the past year and a half. The virus has done little to impact their earnings and, one could argue, the virus has actually increased demand for technology products. Infrastructure stocks are trading at attractive valuations and should benefit from increased government spending. We believe that Government spending will be required to help keep the domestic economy running. Energy stocks, specifically large oil, are appealing due to low valuations, healthy balance sheets which are flush with cash and the bounce back of oil prices. These factors will allow the larger oil companies to selectively acquire smaller energy companies at attractive prices. Chevron’s recent purchase of Noble Energy for $5 billion is a good example.

Overall, stocks to emphasize for Q3 and the remainder of the year are those that have a high fundamental quality factor—a strong balance sheet, a history of revenue and earnings growth and a high return on equity.

Filing Taxes with COVID-19

As Americans were beginning to grapple with coronavirus and lockdown this spring, the government decided to postpone the April 15th tax filing deadline to July 15th. Now that the deadline is approaching, here are some things you should be aware of:

  1. Taxpayers must file or request an extension by July 15th, or they may face one of several penalties.
  2. You may request an extension via the IRS website that can extend your filing deadline to October 15th.
  3. Should you be granted an extension to file, it is not also an extension to pay. If you believe that your prior withholdings or other payments for 2019 were not enough, you may need to estimate what you owe and submit a payment before July 15th.
  4. If you cannot pay, know that the IRS does work with individuals to establish payment plans. It is important to remember that, according to the IRS:  “The failure-to-file penalty is generally more than the failure-to-pay penalty.”
  5. If you are owed a refund, the IRS is currently processing payments and most are submitted to taxpayers within three weeks. Further, if you file on time you may be do interest dating back to April 15th
  6. For taxpayers that file estimated taxes quarterly, the traditional first quarter and second quarter payments must be made by the July 15th deadline.  
  7. For those with simple returns or the “do it yourself-er” types, you can file electronically for FREE at the IRS website while being socially distant.  

*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction

A Primer: Mutual Funds and Exchange-Traded Funds

Mutual funds and exchange-traded funds are common investment products for retail and institutional investors. 

The first mutual fund, the Massachusetts Investors Trust, was created in 1924. From 1924 until the mid-1970s mutual funds were a niche product. It was not until The Vanguard Group established the first retail index fund in 1974 that assets invested in mutual funds began to grow and became mainstream. As of the end of 2019, worldwide mutual fund assets totaled $55 trillion. 

Mutual funds can generally be classified into two types: passive index funds and actively managed funds. Passive index funds track a specific index such as the S&P 500 or the Russell 2000. Actively managed funds are usually classified by the type of investment strategy of the manager. Examples include domestic large-cap growth, investment grade bonds or international value. The manager of the fund will buy and sell stocks or bonds that the manager believes will produce positive returns and that are suitable based on the mandate of the fund.

An exchange-traded fund (ETF) is an investment vehicle that trades on a stock exchange and can be bought and sold during market hours. The first successful large-scale ETF launched in 1993, the SPDRs (or Spiders), which tracked the S&P 500 (Ticker: SPY). Additional ETFs that tracked the Dow, the Diamonds (Ticker: DIA), the NASDAQ 100, the ‘cubes’ (Ticker: QQQ), followed. 

Most ETFs are passive and track a specific index or sector. There are domestic equity, international equity, bond, commodity and currency ETFs. The growth of the ETF market has been 25% annually over the past decade. Over $5 trillion was invested in ETFs at the end of 2019. 

The matrix below summarizes some of the similarities and differences between mutual funds and ETFs. 

ETFsMutual Funds
Passive Index Options

Fixed Income Index Options

Actively Managed Options
Sector-Specific Index Options

International and Country-Specific Index Options

Low Expense Ratios for Passive Index Options
Lower Fees
Superior Tax Efficiency
Transparency of Holdings
Throughout the Day Trading
Throughout the Day Pricing