U.S. Equities

U.S. stock markets posted double-digit returns in the second quarter, with some segments erasing all of the first quarter’s sharp losses. Growth, benefiting from its 44% exposure to Technology, sharply outperformed value (Russell 1000 Growth: +27.8%; Russell 1000 Value: +14.3%), and the spread is even larger on a year-to-date basis (Russell 1000 Growth: +9.8%; Russell 1000 Value: -16.3%). Small caps outperformed large (Russell Microcap: +38.8%; Russell 2000: +25.4%; Russell 1000: +21.8%).

Within the S&P 500 (+20.5%), several sectors posted returns over 30% (Energy, Consumer Discretionary, Technology) while Utilities (+2.7%) fared the worst. It is worth noting that the “FAAMG” stocks accounted for nearly 30% of the return for the S&P 500; collectively the group was up 35% for the quarter.

Global ex-U.S.

Outside of the U.S., double-digit returns were broad-based across developed and emerging markets (MSCI EAFE: +14.9%; MSCI EM: +18.1%) but both remain down roughly 10% over the six-month period. As in the U.S., growth outperformed value, and Technology and Consumer Discretionary were top performers while Utilities were the worst. Currency had a limited impact on developed market results this quarter; the U.S. dollar was fairly flat vs. the euro and yen and mixed versus other developed market currencies. In developed markets, Germany (+27%) and Australia (+29%) were top performers while Japan (+12%) and U.K. (+8%) were at the bottom of the pack. The BRIC countries all performed well in 2Q20 but most remain sharply down ytd (Brazil: +23%/-39%; Russia: +19%/-25%; India: +21%/-17%; China: +15%/+4%).

Fixed Income

U.S. Treasury yields were range-bound in the second quarter; the 10-year U.S. Treasury yield closed the quarter at 0.66%; down only 4 bps from March 31 but off far more sharply from the year-end level of 1.92%. As a result, the Bloomberg Barclays US Treasury Index was up a modest 0.5% for the quarter.

Other sectors recovered from sharp underperformance in the first quarter as investor confidence improved. For the quarter, the Bloomberg Barclays US Aggregate Bond Index gained 2.9%, with non-Treasury sectors faring the best. This is a stark contrast to the first quarter, when U.S. Treasuries were virtually the lone sector to post a positive return. The Bloomberg Barclays US Corporate Bond Index rose 9.0% in the second quarter but has underperformed like-duration U.S. Treasuries by 540 bps ytd. The Bloomberg Barclays High Yield Bond Index posted a double-digit return (+10.2%) in 2Q20 but remains down 3.8% ytd. Issuance set records as companies tapped markets to raise cash; investment grade ytd issuance reached roughly $1.4 trillion, more than last year’s total. Meanwhile, default rates and downgrades escalated. Defaults in 2Q20 across bank loans and bonds hit a quarterly record of more than $80 billion.

With nearly half of the investment grade corporate bond market rated BBB, concerns have grown over the impact of fallen angels (downgraded from investment grade to high yield) on the much smaller high yield market. Nearly $1 trillion is rated low BBB (Baa3 or BBB-). Nearly half of that amount is on a watchlist to be downgraded by at least one rating agency. The high yield market ($1.4 trillion) has already absorbed about $160 billion and estimates are as high as $500 billion for the year. Not surprisingly, the industry with the largest amount of fallen angels is energy. Ford, a recent fallen angel, is now the largest issuer in the high yield market.

Rates were lower overseas, fueled by rate cuts across a broad swath of countries and strong performance from corporates. The Bloomberg Barclays Global Aggregate ex-US Bond Index rose 3.4% (unhedged).

Emerging market debt indices posted lofty results (JPM EMBI Global Div: +12.3%; JPM GBI-EM Gl Div: +9.8%) but remain down single digits from year-end. Returns varied widely across the index of 70+ countries but generally, lower-quality/higher-yielding countries outperformed in 2Q20 but remain sharply lower than their higher-quality brethren ytd. The local currency index also reflected broad dispersion of returns across its 19 constituents, but returns were positive for the vast majority of the countries.

Municipal bonds also rebounded from relatively poor performance in the first quarter; the Bloomberg Barclays Municipal Bond Index rose 2.7% in the second quarter but is up only 2.1% ytd. Taxable municipal issuance totaled $16 billion in June, bringing the year-to-date total to roughly $50 billion, roughly three times last year’s supply and about one-third of ytd municipal issuance.

Real Assets

Listed real assets saw improved performance in 2Q20 compared to the first quarter. The Bloomberg Commodity Index rose 5.1%, though it is still down 17.4% ytd. While agriculture and livestock commodities continued their downward trajectory (-4.9% and -8.6%, respectively) energy and metals saw a considerable bounce, buoyed by crude oil (+31%), gasoline (+70%), copper (+21%), and silver (+29%). The Bloomberg Barclays TIPS Index rose 4.2% and the 10-year inflation breakeven spread ended the quarter at 1.34%, reflecting the market’s depressed inflation expectations over the foreseeable future.

Within the property sector, the FTSE Nareit Equity Index was up 11.8% in 2Q20, but still off 19.3% ytd as the long-term impact of the COVID-19 pandemic continues to weigh heavily on a number of sectors such as Retail and Office. Finally, with regard to the listed infrastructure space, the Dow Jones-Brookfield Global Infrastructure Index also rebounded, finishing the quarter up 9.6% (-10% ytd). Within infrastructure, MLPs rebounded sharply (Alerian MLP Index: +50%; -36% ytd).