Quarterly Capital Market Review & Outlook
U.S. Economic Outlook
- Economic data released in the second quarter suggests the economy’s recovery began as state lockdown measures eased. BBVA USA Research expects the recovery will take an “incomplete V” shape, meaning it will be slower than anticipated and could be impacted by a second wave of new cases.
- The labor market will be important to watch in the coming months to gain insight on the magnitude and length of the current recovery. The U.S. economy added 4.8 million jobs in June on top of the 2.7 million jobs added in May.
- The Federal Reserve has indicated it is committed to do whatever it can to support the economy. If necessary, the Fed could continue to expand its balance sheet, already at $7 trillion, or provide more guidance about the future direction of interest rates.
- The Second Quarter was the best quarter for the S&P 500 since 1998, increasing by 20.5%. For the Dow Jones Industrial Average, it was the best quarter since 1987, with a return of 18.5%. Meanwhile the tech-heavy NASDAQ lead the way with 30.9%. Internationally, both the MSCI EAFE (developed international) and MSCI EM (emerging markets) indices had double digit returns, but lagged compared to domestic markets.
- As we enter into the Second Quarter earnings season, investors will learn a lot about the initial impact of shutdowns on corporate results. While Wall Street analysts are doing their very best to predict those results, we are likely to see actual numbers vastly different than expectations.
- While the quarter saw a broader section of the market do well, diversification in general has not helped returns halfway through the year. Anything outside of large, technology-based businesses has struggled.
Fixed Income Outlook
- In the second quarter of 2020, the U.S. fixed income markets recovered from the volatility in March. It appears the height of the recent move, the highest risk premiums, and widest credit spreads occurred on March 20th.
- After hitting their widest point in late March, credit spreads saw a dramatic recovery throughout the second quarter. The Fed helped stabilize the investment grade corporate credit market by creating a buying program, primarily in the one to five-year part of the curve. Meanwhile the high yield sector had its best quarter in a decade and saw returns of over 10%.
- The municipal bond market experienced a strong rally in the second quarter of 2020 as attractive yields brought investors into the asset class. Increased government intervention, strong investor demand for tax-free income, and limited new issue supply pushed municipal yields lower during the quarter.
Details you need to make a smart decision
BBVA is the trade name for BBVA USA, Member FDIC, and a member of the BBVA Group. Securities products are NOT deposits, are NOT FDIC insured, are NOT bank guaranteed, may LOSE value and are NOT insured by any federal government agency.
This material contains forward looking statements and projections. There are no guarantees that these results will be achieved.
Investing involves risk including the potential loss of principal. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.
Indexes are unmanaged and investors are not able to invest directly into any index.
International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets.
Investments in stocks of small companies involve additional risks. Smaller companies typically have a higher risk of failure, and are not as well established as larger blue-chip companies. Historically, smaller-company stocks have experienced a greater degree of market volatility than the overall market average.
Equity investments tend to be volatile and do not involve the guarantees associated with holding a bond to maturity.
In general, the bond market is volatile as prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
The investor should note that vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. The investor should be aware of the possible higher level of volatility, and increased risk of default.
Municipal bond offerings are subject to availability and change in price. If sold prior to maturity, municipal bonds may be subject to market and interest risk. An issuer may default on payment of the principal or interest of a bond. Bond values will decline as interest rates rise. Depending upon the municipal bond offered, alternative minimum tax and state/local taxes could apply.
The price of commodities is subject to substantial price fluctuations of short periods of time and may be affected by unpredictable international monetary and political policies. The market for commodities is widely unregulated and concentrated investing may lead to higher price volatility.
Investments in real estate have various risks including possible lack of liquidity and devaluation based on adverse economic and regulatory changes.
Other Sources: Bloomberg; California.gov; Russell.com; First page index returns are calculated on a total return basis using the following indexes: S&P 500 (SPX), MSCI World (MXWO), MSCI Emerging Markets (MXEF), BofA Merrill Lynch U.S. Treasuries 1-10 years, BofA Merrill Lynch U.S. Agencies 1-10 years, BofA Merrill Lynch U.S. Corporates 1-10 years A-AAA, BofA Merrill Lynch U.S. Municipals 1-10 years A-AAA, Russell Top 200 Index, Russell 1000 Index, Russell Midcap Index, Russell 2500 Index, Russell 2000 Index, Credit Suisse High Yield Index (CSHY), MSCI U.S. REIT Index (RMZ Index).