Review: Second Quarter 2020

A Quarter in Perspective

How do you define a period where, at one point, oil futures went negative? This means the delivery price was so low that if you purchased the option someone had to pay you to take it. (Like paying someone to take your car away.) By the end of the quarter the reported price of a barrel of oil had rebounded to $39. Unemployment reached an all-time high of 14.7% in April and closed the quarter at 11.1%.1 The coronavirus pandemic appeared to subside only to surge again as people relaxed the precautionary protocols of wearing face masks and maintaining safe distancing. This was a period of profound turmoil.

If the job market, the health situation, and the economy were not enough to address, the Black Lives Matter protests rose with a great deal of energy. This in turn brought the police under greater scrutiny. Much of what we are seeing in the U.S. is also happening around the rest of the world. So, why has the stock market responded in such a positive way during this period that seems so negative?

The Juxtaposition of Events

To me the single biggest element of recovery is resilience. Many workers were working from home and some indications are that they were more productive. Governments slowly allowed businesses to open and many became very creative in how they now provide services. The fundamental change from brick and mortar to e-commerce gained a significant hold. Consumers continued to spend, but the saving rate also went up sharply. The unemployment rate receded, and there are some indications that once the extra $600 per week of unemployment expires at the end of July, many workers will want to return to work. There are currently several pharmaceutical companies in advanced trials for a coronavirus vaccine. The price of oil had been down substantially because people weren’t driving. Americans are driving again! The wave of expected bankruptcies and defaults were below what Wall Street had expected. Some in the media and some politicians tend to focus on all the negatives; but there are many positive things happening now. The stock market is less interested in where we are now and more interested in “where will we be in six months?”

Numbers Review

The S&P 500 ended the second quarter at 3100, up 515 points from the beginning of the first quarter, for a gain of 20%.1 As of the end of the quarter the average was down 4% for the year. The S&P Mid Cap index closed the quarter at 1783, up 340 points, for a gain of 24%. This index is down 13.6% for the year. Small cap stocks, as measured by the S&P Small Cap 600 index, were at 831, up 21% for the quarter. For the year, this index is down 18.5%. Using the DJ Global ex U.S. index for international stocks, it ended at 232, up 16% for the quarter and down 11.8% for the year.

Bonds, unlike stocks, were mixed for the quarter. The 10-year Treasury went from 0.58% up to 0.65% resulting in an investment loss for the quarter. The Bloomberg Barclays US Aggregate Bond Index fell to 1.26%, for an 8.74% gain for one year.1

Changes to Allocations

For those accounts where we have discretion, we made some changes over the past quarter. The first thing we did in mid-April, was to rebalance accounts to take advantage of the changes in relative values. In looking at real estate we concluded that its near term performance would not fit our strategy and we eliminated all real estate positions. Once markets settled down in mid-June, we made some additional changes to many of the portfolios. We greatly reduced, or eliminated, emerging markets debt and equity. We reduced the international allocation on most accounts. Finally, we introduced a value stock component to many of the portfolios. It is our belief that value stocks, which have been out of favor since early 2016, are due for a rebound. In addition, they are providing greater dividends than growth stocks. For qualified plans we also made some adjustments to the overall allocation and reduced the number of positions held in most accounts.


This has been a very difficult time in the world. The markets reflect some optimism. At the low point for the S&P 500, on March 23rd, the average was down 33.8%. As noted above, by the end of this quarter it was down 4% year to date.1 Medium, small, and international stocks have not recovered as well but have still had significant gains over the quarter. Much of what we are seeing reflects the actions that have been taken to stem the pandemic and implemented fiscal policy. The markets are still unsettled, and we expect continued volatility. While diversification has not been a panacea, diversification has proven helpful.

Ed Mallon


1Markets Digest, Wall Street Journal, July 1, 2020