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The S&P 500 stock index recorded one of its best quarters in history for the 3-month period ended June 30. The snapback from the very sharp decline in March was almost unprecedented in its speed and the size of the gain. Indeed, the 100-day period ended June 30 was the best in history according to Bespoke Investments. All 10 sectors recorded positive price returns for the quarter led by consumer discretionary, info tech and energy while consumer staples and utilities lagged significantly. As a result of the big move in the quarter, the S&P 500 finished June down only 4% year-to-date. However, the sector performance over that 6-month period was hugely disparate with info tech up 14% and energy down 37%. Consumer discretionary is the only other sector with positive first half price returns. The pandemic produced significant winners and losers. The gainers were companies in the right place at the right time, plus those that adapted quickly to the changing environment.
The strong second quarter move in stock prices is attributed to hopes for a sharp rebound in corporate earnings in 2021, an unprecedented monetary and fiscal response, and a possible vaccine next year. Analysts are currently projecting a 30% jump in S&P 500 operating earnings in 2021. Near term earnings results will be quite ugly, however, as the consensus expects that earnings in the second quarter fell 43% and third quarter estimates call for a decline of 25%. On Thursday, the Labor Department reported 4.8 million new jobs as the unemployment rate dropped by 2.2 percentage points to 11.1%, still far above the pre-pandemic half-century low of 3.5%. Many of these jobs were a function of states lifting stay-at-home orders and beginning the process of reopening their economies. Of course, that has also led to a spike in new coronavirus cases in several states as many citizens are disregarding the dangers of COVID-19. Now some states are halting or reversing some of the reopening. Many small businesses are not represented in the stock market, but small business is America's job creator. Their inability to operate is why nearly 20 million Americans remain unemployed and unable to pay their bills. U.S. bankruptcies are growing at the fastest pace since 2009.
The government response has been massive. Government spending as a percent of the economy (GDP) is over 35%, a level only exceeded during WWII. The Fed, meanwhile, has increased the money supply well in excess of any other time in history as illustrated in the graph below (shaded areas are past recessions). With money supply rapidly increasing and with real (after inflation) interest rates now negative, gold has also been appreciating.
At least 70 companies worldwide are actively working on a COVID-19 vaccine with Pfizer recently reporting positive test results from its experimental vaccine. Their tests (on a small sample) showed it is safe (no side effects) and prompted patients to produce antibodies against the virus. The next stage of tests will start as early as this month and involve as many as 30,000 patients. If the vaccine is successful, Pfizer expects to manufacture up to 100 million doses by the end of this year and potentially more than 1.2 billion doses by the end of 2021.
In the meantime, stock market volatility remains high with two pullbacks of 6% and 7% during the second quarter rally. We anticipate volatility will continue at high levels as second quarter earnings are released over the coming weeks and as news of new coronavirus cases dominates the news. The November elections are another wildcard for the market during the second half of the year.
Nevertheless, despite the many potential risks, we believe the long-term prospects for the stock market exceed that of bonds or cash in this era of ultra-low interest rates. In the near term, stock prices will trade on emotions, but over the long term prices will follow the underlying value of the companies. And those values will increase over time as entrepreneurs and workers strive each day to produce goods and services that ultimately benefit their firms.
The LVM Team