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Second Quarter 2020

These past three months have tested our patience, resolve, ingenuity, and tolerance. Comparing COVID-19 to a global natural disaster is a plausible comparison- an event that rapidly destroyed an area and rebuilding is needed to bring a community back to normal. However, normal is being redefined. The rules have been rewritten when interacting in public with face coverings and social distancing becoming the new normal. Market trends from pre-COVID have only accelerated and further separated the “winners” from the “losers” (growth, especially technology stocks versus value stocks) in a rapid fashion. Winners include cloud computing, online shopping, work from home technology, video conferencing, rapid drug development, and telemedicine. Losers include large physical department stores, restaurants on the financial edge, cruise lines, business travel and energy companies. Visiting a natural disaster area after a rebuild might look normal on the surface, but the inhabitants have been changed by it and this now applies on a global scale. Our lifestyles and the way we work have been redefined.
The second quarter rapid financial decline was met with extensive monetary and fiscal policy, through stimulus checks, the Paycheck Protection Program (PPP), Federal short-term rates near zero, and Federal Reserve fixed income purchases. So far, this helped put a floor on the markets and provide some optimism in future business activity. The equity and fixed income markets have rebounded off this news as well as the flattening of the COVID-19 curve. Economic data swung wildly throughout the quarter. Housing indicators held up well with lower demand being offset with lower mortgage rates and lower supply. Manufacturing indicators entered contraction territory only to then be back in expansion territory by the end of the quarter. Although the unemployment rate is extremely high, an increase in jobs has been reported as businesses slowly reopen, and employees return to work.
A graph of the U-3 Unemployment Rate (US) Source: Bloomberg
U-3 Unemployment Rate (US) Source: Bloomberg
Consumer spending growth fell rapidly as businesses closed, however consumer savings rates expanded, and recent pent up demand helped offset some of the decline. The ever-changing COVID-19 cases can at times cause economic data to be out of date, even though it is only a month old.
Against this backdrop, the following indices returns are listed below:
Index 2Q2020 Year to Date
All Country World Index (ACWI) 19.41%  -5.98%
S&P 500 (SPX)   20.54% -3.09%
Dow Jones (INDU)  18.51%  -8.43%
Nasdaq (CCMP)  30.95%  12.74%
A graph of the 2Q2020 Total Return Source: Bloomberg2Q2020 Total Return Source: Bloomberg
A graph of Year to Date Total Return Source: BloombergYear to Date Total Return Source: Bloomberg
Where do we go from here? The equity markets are currently discounting a return to normal earnings by the beginning of 2021 which may be premature. At the time of this writing, the U.S. is experiencing a resurgence in COVID-19 cases and significant unemployment. However, I believe volatility will be the most consistent factor in the markets as we progress through 2020. A resurgence of COVID-19 will dominate the headlines, but also the U.S. presidential election in November, another possible round of stimulus for individuals, potential infrastructure bill, vaccine progress, deferred debt payments, unemployment, China trade negotiations and a complete vacuum of visibility on company earnings will continue to contribute to volatility in the markets. These factors have confounded market strategists resulting in a wide range of market outlooks from excessively bullish to extremely bearish. Given all these cross currents we must attempt to use the volatility to our advantage and look for new investment opportunities in this “new normal.”
At Century Bank Wealth Management, we had made changes to the model portfolios towards the end of the first quarter to better position the portfolios for the uncertainty and volatility that lies ahead. We removed a “deep value” fund in favor of a “core” fund due to the continued under performance of value stocks versus growth stocks. We also increased the overall credit quality in the fixed income portion of the portfolio to help bolster against a downturn in the economy. We are also using this period to take advantage of new investment opportunities that have presented themselves as mentioned earlier in this letter. Whether you are investing through our model portfolios or not, given all uncertainty and volatility, it may be a good time to revisit your risk profile. If something has substantially changed in your life or your business, please reach out so we can work together to place you in the appropriate strategy.
Phil McManus
Chief Investment Officer
Wealth Management at Century Bank logo.
Not insured by FDIC or Any Other Government Agency. Not Bank Guaranteed. Not Bank Deposits or Obligations. May Lose Value.
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