After staggering pandemic-induced volatility and the most severe bear-market retreat since the “Great Recession” of 2008, global equities reversed the tide to post their strongest serial advance ever on hopes tied to a rapid economic reopening, multiple vaccine trials, and historic levels of fiscal stimulus and monetary support not seen since WWII (CNBC, “This is the greatest 50-day rally in the history of the S&P 500,” 6.3.20).

For the quarter, the S&P 500 finished higher by +20.2% (‘SPY’ ETF Proxy), just below all-time highs. While impressive, in-fact just five large-cap technology stocks drove the recovery, leaving the broader market still within 2017 levels (MarketWatch, “Investors face a scary, out-of-whack scenario…,” 7.13.20). As beneficiaries of the “work-at-home” trade, technology-weighted indices broke out to new highs as the “growth” and “defense” trades became one-in-the-same. With less room for monetary policy response, developed foreign nation stocks slightly under performed, up +16.9% (‘VEA’). Even the badly damaged real estate and commodities classes posted high single-digit returns. Finally, US aggregate bonds tacked on another +3.1% (‘AGG’) for an “everything higher” wrap to the second quarter of the year.

As price trends repaired themselves across multiple asset classes and time-frames, volatility also subsided on the premise that the global economy can reboot itself quickly. While there have been reasons for optimism among select economic reports, there are likewise no shortage of reasons for continued caution. For one, credit-spread and volatility levels remain above those associated with healthy, unfettered bull-markets. For another, valuations have run far ahead of earnings. Looking historically, although aggressive strength generally supports further gains, markets were similarly optimistic after the “Great Crash” of 1929, but subsequent failed in epic fashion. Open watch items include earnings, US-China relations, upcoming national elections, and a stuttering reopening process after a second wave of infections. Regarding earnings, analysts foresee 40-60% trough declines in Q2 followed by a strong rebound set for 2021 (Fortune, “How bad will Q2 earnings be?,” 7.13.20). Markets are clearly looking through the current gloom towards the proverbial light-at-the-end-of-the-tunnel ahead.

While the “letter debate” continues as to whether we will see a “V”- or an “L”-shaped recovery, the facts will take months to play out. Meanwhile, although the economy has our models leery, they are gradually rebuilding equity allocations on falling volatility. Whether this rally extends through the summer or turns out be a bear-market reprise, we will adjust holdings accordingly.

* Not Individual Investment Advice; Dividend-adjusted proxy ETP data from Commodity Systems, Inc. & Allocations as of June 30, 2020 may not apply to all clients; ECA assumes no duty to update any information in this presentation for subsequent changes of any kind.