It is hard to believe that half of the year is behind us, even though the past few months seemed to drag on as we acclimated to a new way of living and working in the midst of a global pandemic. We hope you are all adjusting to the new normal as best you can and that you and your families are safe and healthy.

There has been no shortage of activity and change over the past quarter. Congress and the Federal Reserve have released trillions in fiscal and monetary aid to the American people. Governments and central banks across the globe have acted in a similar fashion. As a result of swift action, markets recovered nearly all that was lost following steep declines in March. The S&P added 20.54% this quarter and is only down 3.09% on the year. International markets, as measured by the MSCI EAFE index, are up 15.15% on the quarter and down 11.03% on the year.

A handful of states have experienced a significant increase in COVID-19 cases during the past several weeks. Areas that reopened earlier and were more relaxed about enforcing preventative measures have seen the biggest outbreaks. States like Texas and Florida have paused additional reopening plans as total positive cases surged to above 100,000 in both states. While morbidity rates in recent weeks have been falling, many fear this case resurgence could cause the morbidity rate to increase once again. This trend is also playing out around the world as cases increase in countries like Austria, Iran, Japan, Brazil, and Russia.

Prior to the recent uptick in cases, economic data had been more positive than originally expected. Consumer spending rose 8.2% from its April low. The National Multifamily Housing Council reported that 92.2% of renters had fully or partially paid their June rent. U.S. households are benefitting from remote technology which allows many to maintain their employment from home. Additionally, expansions to unemployment benefits have helped those individuals who were laid off during this crisis. The unemployment benefit changes were important given that the U.S. unemployment rate leapt from a 51-year low of 3.5% in February to a post-World War II high of 14.7% in April. This rate increase is unprecedented and unemployment will likely be a key hurdle to a full recovery. Many of the unemployed are from industries that will likely remain affected for quite some time, such as travel, dining, lodging, entertainment, and retail.

The biggest driver of the current stock market recovery has no-doubt been the stimulus provided by Congress and the Federal Reserve and the implicit promise that more will be provided if needed. These actions allayed fears in the market and thus prevented a wider panic that may have worsened the crisis. Conversely, there are worries that many of these actions could lead to unintended economic consequences in the long-term, including alteration of the Federal Reserve’s role in the future. But for now, wide accommodative policy will be in place and more is likely on the horizon – though the timing is uncertain.

Looking ahead
Reopening the economy will not be a linear process. As we have now seen, there will be setbacks along the way. Each city, state, and country will have to feel its way back to normal and it will take time. For social distancing measures to be effective, individuals will need to self-regulate to a large degree. All eyes are on treatment and vaccine development, which will likely drive market sentiment in the near term. Despite continued accommodative monetary policy and even additional stimulus, markets will likely remain volatile, reacting more to headlines and rumors than to fundamentals.

Our investment committee’s view is that markets may have moved too far too fast, and as a result we have moved target allocations back to the midpoint of the range – selling stocks and taking gains in many of our client portfolios. This reverses a more aggressive approach taken earlier in the year following steep market declines. The committee also reaffirmed its stance on being strategically overweight to domestic stocks relative to international stocks because the larger more resilient multinational firms located in the U.S. should continue to perform better in the intermediate term.

We remain vigilant in seeking opportunities while at the same time exercising caution over what we view as elevated market valuations and rosy expectations amid still high levels of uncertainty. We are not out of the woods yet. As states and foreign economies begin to reopen, the COVID-19 case resurgence threatens a full economic comeback and additional policy response coordinated around the world may be needed. It is still unclear how this crisis will end and how it will shape the global economy in the years to come.

As always, we are here to answer your questions and make sure your current asset allocation is still appropriate for your circumstances. If it has been a while since you have visited with us, please do not hesitate to call or email and set up a meeting with your Hills Bank Wealth Management Officer.

Some trust products and IRA contributions/balances are not a deposit, not FDIC insured by any federal government agency, not guaranteed by the bank and may go down in value.