Zoë Brunson: Market Update

Second Quarter 2020

Market Review Q2 2020

Zoë Brunson, CFA

Senior Vice President, Investment Strategies

AssetMark, Inc.

In the same way equity markets tumbled quickly in the first quarter, we saw a rapid rebound. US equity markets rallied strongly with a return of 20.5% for the quarter. Despite being the best quarter since 1998 and one of the top 10 quarters in history, year-to-date returns were still in negative territory at -3.1%.¹
Concentration was the name of the game. Performance of the US equity markets has been concentrated in a few stocks over the past few years – Facebook, Amazon, Netflix, Apple, Microsoft, Alphabet (Google). The performance of these six stocks contributed 5.4% to the S&P 500 return while the remaining 494 stocks contributed -8.4% to the S&P 500 return year to date.²
A trio of sectors saw returns over 30% for the quarter. Consumer discretionary was the leader of the pack at 32.5% as consumer spending picked up in the second quarter followed by energy and technology, both seeing returns of 30.5% for the quarter. Year-to-date only two sectors saw positive returns – technology and consumer discretionary – while energy was the worst performing sector, down 35.3% year to date due to the -50.5% return seen in the first quarter.³
Smaller cap stocks turned the tables while value and dividend equities still trailed. After many quarters, smaller caps saw the first quarter of outperformance relative to the larger caps and growth as higher beta stocks rallied. Mid- and small-caps outperformed by 3.5% and 1.4% respectively for the quarter. Large-cap value trailed large-cap growth by 13.1% over the quarter and by 23.5% for the year to date.⁴ Similarly, dividend equities with their large exposure to financials, utilities and energy trailed the broad market by around 10% for the quarter and by 18% year to date.⁵
Global equities saw their best quarter since 1999 with only one country seeing a negative return for the quarter. Emerging markets fared better than developed markets, benefiting from the rebound in commodity prices but both still trailed the US markets for the quarter and year to date. Only one emerging market country, China, saw a positive return year-to-date at 3.6%.⁶
Unlike the equity markets, the US bond market trailed international and emerging market bonds for the quarter. Rebounding strongly, the emerging markets were the strongest region with a return of 10.0% and the developed markets saw a return of 3.4% benefiting from dollar weakness as a result of the unprecedented monetary and fiscal stimulus.⁷
US bond markets also saw positive returns across the board. Like equities, sectors that saw the biggest drops in the first quarter rebounded strongly to lead the pack in the second quarter. However, the broad bond index saw a return similar to the first quarter as the weakness seen in Treasuries countered the strength seen in the credit markets.
In the US markets credit saw the strongest returns with high-yield at 10.2% and investment grade at 9.0%. While investment-grade credit returns were lifted into positive territory year-to-date at 5.0%, high-yield were still negative at -3.8%.⁸
REITS and commodities also saw rebounds in the quarter, 13.2% and 5.1% respectively, but they were not as strong as the higher-beta asset classes. The almost 100% price surge in WTI oil helped lift the energy sector while the steady gains of gold, rising in 5 of the 6 months year to date led to a 17.1% return year-to-date.⁹

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Asset classes are represented by the following indexes:

Asset Class	Index
Emerging Markets Bonds	Bloomberg Barclays Emerging Markets USD Aggregate - is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate US dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers. Country eligibility and classification as Emerging Markets is rules-based and reviewed annually using World Bank income group and International Monetary Fund (IMF) country classification.
Global Bonds	Bloomberg Barclays Global Aggregate - is an index of global investment grade debt from 24 local currency markets including treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. The index also includes Eurodollar, Euro-Yen, and 144A Index-eligible securities, and debt from five local currency markets.
US Bonds	Barclays US Aggregate - measures the market of USD-denominated, investment grade, fixed-rate taxable bond market of SEC-registered securities, including bonds from the Treasury, government-related, corporate, mortgage-backed securities (agency fixed-rate and hybrid ARM passthroughs), ABS and CMBS sectors. US Agency Hybrid Adjustable Rate Mortgage (ARM) securities were added to the US Aggregate Index on April 1, 2007.
International Bonds	Bloomberg Barclays Global Aggregate ex USD - is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate US dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers. Country eligibility and classification as Emerging Markets is rules-based and reviewed annually using World Bank income group and International Monetary Fund (IMF) country classification.
High-Yield Bonds	Bloomberg Barclays US Corporate High Yield – measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt.
Investment-Grade Bonds	Bloomberg Barclays US Corporate Investment Grade – is a broad-based benchmark that measures the investment grade, fixed-rate, taxable, corporate bond market. It includes USD-denominated securities publicly issued by US and non-US industrial, utility, and financial issuers that meet specified maturity, liquidity, and quality requirements.
Long-term Treasuries	Bloomberg Barclays US Treasury Long – measures the performance of long term government bonds issued by the US Treasury. It includes all publicly issued, US Treasury securities that have a remaining maturity of 10 or more years, are non-convertible, are denominated in US dollars, are rated investment grade, are fixed rate, and have $250 million or more of outstanding face value.
Global Equities	MSCI ACWI – is a free float-adjusted capitalization weighted index that is designed to measure the equity performance of countries considered to represent both developed and emerging markets.
International Equities	MSCI EAFE - is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of countries considered to represent developed markets, excluding the U.S. and Canada.
Emerging Markets Equities	MSCI Emerging Markets – is a free float-adjusted, market capitalization index that is designed to measure the equity market performance of countries considered to represent emerging markets.
US Equities	S&P 500 – is an unmanaged index that is generally considered representative of the US equity market, consisting of 500 leading companies in leading industries of the US economy (typically large cap companies) representing approximately 75% of the investable US equity market.
Mid-Cap Growth	Russell Mid Cap Growth – measures the performance of the mid-cap growth segment of the US equity universe. It includes those Russell Mid Cap Index companies with higher price-to-value ratios and higher forecasted growth values.
Small-Cap Value	Russell 2000 Value – measures the performance of the small-cap value segment of the US equity universe. It includes those Russell 2000 Index companies with lower price-to-book ratios and lower expected growth values.
Gold	Bloomberg Sub Gold – is a commodity group sub-index of the Bloomberg Commodity Index composed of futures contracts on Gold. It reflects the return of underlying commodity futures price movements only and is quoted in USD.
Commodities	Bloomberg Commodities – is a broadly diversified benchmark that measures the futures contracts of physical commodities traded on US exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange (LME). The component weightings are also determined by several rules designed to insure diversified commodity exposure.
REITS	FTSE NAREIT All Equity REITs – measures the performance of publicly traded US real estate securities, such as Real Estate Investment Trusts (REITs) and Real Estate Operating Companies.
Global 60/40 Blend	60% MSCI ACWI / 40% Bloomberg Barclays Global Aggregate – is a blend of global equities and global bonds indexes used as a benchmark for a balanced portfolio.

¹ Source: Morningstar, S&P Dow Jones Indices
² Source: FactSet
³ Source: Morningstar, S&P Dow Jones Indices
⁴ Ibid.
⁵ Source: Morningstar, S&P Dow Jones Indices
⁶ Source: Morningstar, MSCI
⁷ Source: Morningstar, Bloomberg Barclays Indices
⁸ Ibid.
⁹ Source: Morningstar, FTSE, Bloomberg Barclays Indices

C20-16253 | 07/2020 | EXP 07/31/2021
821503-11183

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