Key Investment Perspectives: July 2020
Optimism grew as the calendar turned to June: More and more businesses reopened, and new data indicated that the worst of the economic downturn could be in the past. Employment numbers in June were far better than expected, providing support for the belief that the recovery is taking hold. Reflecting the increasingly positive mood, the S&P 500 Index rose 20% in the second quarter — driven by exceptional results in April and May — for its best quarter in more than 20 years.
However, there are emerging signs of concern, including new closures, a second wave of COVID-19, civil unrest and geopolitical discord. Investors continued to balance these against signs of hope.
One relatively new area of investing that has generated outperformance during the market turmoil is ESG (Environmental, Sustainable, and Governance) investing. We examine this approach in this month’s Key Investment Perspectives, looking at its philosophical foundations and analyzing its results.
- Global Equities: The S&P 500 Index posted an increase of 2% in June, resulting in a year-to-date loss of just over 3%. While domestic small caps did slightly better than large caps (3.5 vs 2%) in June, they remain far below them on a year-to-date basis. International markets outpaced US equities in June as developed markets returned 3.4% for the month and emerging markets soared 7.5%.
- Fixed Income: Fixed Income returns were mostly positive in June with US Treasuries (5–10-year maturities) returning 0.1%, resulting in a 9.6% YTD return. Interest rates were little-changed across the yield curve as the economy continued to open and the broader market stabilized further. The fixed income credit market maintained its rally in June, and high-yield municipals continued their recovery.
- Tactical Allocation: We believe investors should maintain a balanced (or neutral) position toward risk and play offense defensively and play defense offensively as uncertainty lingers. This means emphasizing quality across asset classes as market participants must navigate two powerful yet countervailing forces: massive (and seemingly limitless) financial stimulus versus the uncertain path of a novel and previously unknown virus as a sufficient medical response remains undefined.