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2nd Quarter 2020 Commentary

Updated: Jul 21

We are certainly living in interesting times. The coronavirus has made a significant impact on the global economy as every corner of the globe struggles with how best to mitigate the pandemic’s effect on human life and economic activity. The measures taken to flatten the re-infection rate, such as lockdowns and social distancing, have proven effective in reducing the stress on the health care system; however, it has come at a significant cost. Extraordinary measures were taken to reduce the economic impact from lost employment and wages through government programs such as the CARES Act and the PPP (Payroll Protection Plan). Although there are no easy answers, significant progress is being made.


Though earnings, employment rates, and much of the economic metrics are measurable, the change in consumer behavior due to the pandemic is unpredictable. Theme parks, sporting events, concerts, public transportation, and the workplace environment are all subject to significant changes. Even with a vaccine or herd immunity, it is difficult to ascertain how we conduct business and adapt shopping habits in a post-Covid world. Unemployment has fortunately dropped to 11% and we hope that continues; however, much uncertainty remains.


The second quarter of 2020 was witness to a remarkable rebound in the equity markets as they bounced back in dramatic fashion from the precipitous declines of the first quarter. The S&P 500 posted a 20% gain on the quarter, while the broader Russell 1000 Index was up 21.8%.


Source: FTSE Russell

Below is what looks to be a mirror image of the equity markets with 2nd quarter price returns on the upper graph and 1st quarter on the lower.


Source: S&P Global Cap IQ, MSCI, FTSE Russell


The Energy sector experienced the wildest ride during the first half of 2020 as the price of crude oil dropped over 65% in the first quarter and subsequently gained over 90% in the second quarter. The ride included a perplexing journey into negative territory for crude futures as a result of increased production, a sharp contraction in demand, and storage capacity issues.


Source: S&P Global Cap IQ

The Discretionary and Technology sectors also had big gains on the period as on-line retailing and technology services saw a spike in demand due to the coronavirus lockdown. Amazon posted a gain of more than 40% on the quarter leading the Discretionary sector, while tech stocks Apple and Microsoft were the largest contributors in the Technology sector with increases of 44% and 29%, respectively. With the continued rise in FAANMG stocks (Facebook, Apple, Amazon, Netflix, Microsoft, and Google), these stocks now represent more than 20% of the S&P 500 Index, while the Technology sector represents over 27% of the Index. The tech heavy Nasdaq 100 was one of the strongest performing indexes on the quarter with a gain of over 30%.

Source: S&P Global Cap IQ

The sharp rise in technology related issues led the Growth style to outperform on the period as the Russell 1000 Growth Index outpaced its Value counterpart by 13.5% for the quarter and by more than 26% year to date. The spread between the Growth and Value indices has not been this wide since the tech bubble in 2000.


Source: FTSE Russell


A rebound in the equity markets does not come as a surprise, when markets fall that far, that fast, they usually make somewhat of a recovery. However, the magnitude of the bounce has caught many by surprise, especially given the fact that it is still unclear how much of an economic impact the pandemic will cause. Given the amount of uncertainty around employment and economic growth, the Federal Reserve has indicated they expect to keep short term interest rates where they are for the foreseeable future. Needless to say, they are very accommodative.



Source: S&P Global Cap IQ


The Fixed Income markets also fared well for the 2nd quarter, not quite 20% returns but respectable, nonetheless. Below are the quarterly returns of select Barclays Fixed Income Indices.

Source: Addepar, Barclays


On one hand, it is understandable that the markets are showing strength. Monetary policy is extraordinarily accommodative and is expected to remain so for quite a while, a recovery from the coronavirus lockdown should have a meaningful impact on corporate earnings, the amount of liquidity pumped into the economy is nothing short of staggering, and a V-shaped recovery will likely put most of the unemployed back to work. However, on the other hand, the amount of debt that the government has taken on will have a negative impact on growth, economic activity was starting to slow before the pandemic, valuations are higher than they were at the start of the year, and we are facing a presidential election.


Collaboration Capital remains vigilant in assessing conditions and continues to collaborate with those that understand the risks and can navigate the landscape in a prudent and effective manner. A focus on high quality securities and fundamental evaluation has always been the preferable method of portfolio construction for Collaboration Capital and we believe it is increasingly more important.


Stay safe!

George Rooney, CFA

Portfolio Manager

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