In the second quarter of 2020 a significant portion of the equity market losses from the first quarter were recovered, at a swiftness that caught even experienced investors by surprise. The speed of recovery has stirred consternation with investors as to whether the gains will hold, given the economic challenges ahead. Before elaborating on that below, the approximate year-to-date returns of major indices as of the end of June are as follows:

  • S&P 500 -3%
  • Russell 2000 (Small Cap US Stocks) -13%
  • MSCI ACWI Ex-US (International Stocks) -11%
  • Barclays Aggregate Bond +6%

To better contextualize the contrast of the second quarter’s faltering economy alongside a rising stock market, there are three considerations that may have been discounted.

  • First, the market is forward-looking. Investors attempt to price in available information ahead of time. Thus, when economic data is released, ‘the market’ evaluates the data compared to its ex-ante expectation of the data. Bad data that is ‘less bad’ than expectations can be a positive.

  • Second, it is useful to remember that buying a stock is buying a fraction of a business, and as a fractional owner, an investor is buying the net present value of expected future cash flows. These cash flows [hopefully] will be received over many decades, thus even the complete loss of earnings for a year would be a small portion of the net present value of the business.

  • Third, owners of capital are always evaluating alternatives in how they believe they can receive the highest risk-adjusted return. Since cash and bond yields have moved dramatically lower, and are now under 1% for Treasuries with maturities up to 10 years, investors may respond by paying a higher multiple for stocks.

In the long-run, stock prices follow earnings, and therefore large disconnects between the economy and the market eventually find a new equilibrium.

In times like these, we believe it is as important as ever to stick to the ‘blocking and tackling’: revisit your financial plan; confirm that your asset allocation is aligned with your need, ability, and willingness to take risk; emphasize areas within your locus of control (ex: spending and saving); and stay the course.

We encourage you to call, email, or use our online portal at any time if you want to check-in on your journey or if we can help you with any questions.


Daniel Schoenecker, CFA, MBA
Chief Financial Officer

Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The MSCI ACWX Index is a float-adjusted market capitalization index designed to track the investment results of an index composed of large and mid-capitalization non-U.S. equities. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index .  The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities.