Ron Rough, Chief Investment Officer, talks about what we’ve seen in the market this year and what we might expect for the second half of the year.
July Stock Market Update Transcript
Hello, this is Ron Rough, Chief Investment Officer for Financial Services Advisory, with a market update video for July.
What a quarter it was. When I was speaking to you three months ago, stocks were in free fall; it had been one of the worst quarters ever. And now here we are three months later. And as you can see from the chart I’m showing here, stock indexes are down, in some cases double digits, but it’s been quite a recovery. And the bond indexes have actually done relatively well.
So it’s certainly masked. If you’re looking at the year-to-date numbers, it certainly masks the volatility that we had between quarter one and quarter two. And here’s the journey. So in the first quarter we had this huge drop that took stocks down over 30%. And then in the second quarter, this huge rebound that, while we haven’t gotten back to the high levels that we saw in February, we certainly have made a tremendous amount of progress.
And so of course, that leaves us with the question of, well, where to from here. This is how our portfolios look at the moment or at the quarter end. What’s interesting is you could almost flip the money market positions and the equity positions from our update at the end of March. So we took the portfolios completely to cash in the first quarter as stocks were falling, and now we’ve got the portfolios. We’re not back to fully invested but pretty close. And I’ll talk in just a minute about what we’re looking for before we do that.
So this chart here, you can see that since early June, stocks have been in what we tend to call a landing. And so we’re waiting for stocks to break out of that landing before we would get the portfolios to fully invested. By the same token, if stocks were to break down from there, we would also begin to start building up our money market position again.
Now I know for many folks, the question is, “Gosh, we’ve had this big quarter. What are the prospects that this can carry on? Or are we just got to turn right back down again?” The table I’m showing you here should give you some comfort to say, at least using history as a guide, strong quarters begat further strong quarters. So it doesn’t mean it’ll happen this year, but just looking at history as a guide, we shouldn’t let the fact that we had a strong second quarter make us feel that all the good numbers are in for the year. So that’s encouraging.
Now the reality is, within a year, there are factors that have to be considered. And certainly for this year, there are several. The pandemic. What will be the progress on controlling the pandemic in the second half of the year? That’s very important. And then related to that, the economic recovery, how is that progressing?
We had a huge drop-off in economic activity, a huge spike in unemployment in the first quarter. We’ve seen a big comeback in both of those areas. GDP growth has bounced. Unemployment is starting to come back. But is that going to continue in the second half of the year?
And then the third factor that really hasn’t gotten much attention yet, but historically you would have heard a lot more about it, and that’s the presidential election. That always has the potential to throw the markets around positively or negatively as the campaign heats up. And that will certainly be heating up here in the third quarter. So that will certainly have an impact on market returns.
But as you know, as a technical firm, we are focused on underlying market trends. So as you look at this chart here that I’ve been showing a couple of times, we are in an uptrend. If that trend continues, then our portfolios will remain invested. If in the third quarter that begins to roll over for any reason, we will start to raise cash again, certainly as our FSA safety nets are triggered.
So all systems are go at the moment, but there are plenty of opportunities for the markets to struggle here in the second half of the year. So we want to be very sensitive to that and very mindful of our main goal which is to contain losses.
Here at FSA we have decided to stay remote through Labor Day. So we hope that you folks in the summertime have been able to get out a little bit, and we hope you’re staying safe, but just know that we are here. We’re just a phone call away, and we can use Zoom calls and Microsoft Teams to meet with you. And so enjoy your summer, and until our next update, thank you for watching.
Ron joined the FSA team in 2006 and is responsible for the day-to-day management of client portfolios, including portfolio construction, fund selection, and risk management. Along with his daily responsibilities, Ron contributes a monthly market commentary and develops presentations for clients and prospects.