Market Insight Quarterly| Second Quarter 2020 | July 21, 2020


  • S&P 500 Index has its best quarter ever. The S&P 500 Index followed up first quarter 2020, one of its worst quarters ever, with its best quarter since 1998, returning 20.5%. The broader Russell 3000 Index fared even better during the quarter with its 21.5% return. Coming off severely oversold levels, stocks were lifted by evidence of a strong rebound in economic activity as states reopened, bolstered by massive fiscal and monetary stimulus. Optimism regarding potential COVID 19 therapeutics and vaccines further fueled one of the strongest rallies ever from the bear market low on March 23. The strong rally left the total return for the S&P 500 (including dividends) down just 3% on the year as of June 30.

    Within the broad market, small cap stocks outpaced large caps, benefiting from their relatively greater sensitivity to strong market rallies and tendency to outperform early in economic cycles. Growth stocks were beneficiaries of the lockdowns, which benefited such growth areas of the market as technology, digital media, and e-commerce, while financial services stocks underperformed and weighed on value stocks.

    The most economically sensitive sectors generally outperformed, led by consumer discretionary and technology, while energy and materials also outpaced the broad stock market indexes.

    Regionally, emerging market and developed international stocks produced solid gains in the quarter, but they were unable to keep up with the US rally, as the MSCI Emerging Markets and EAFE Indexes both lagged the S&P 500 and Russell 3000 Indexes.
  • Credit paced solid fixed income returns. Despite the strong stock market rally, US Treasuries still saw solid demand, with the 10-year Treasury yield actually dipping 0.04% (4 basis points) over the quarter to 0.66% on June 30. Steady Treasury yields and narrowing credit spreads as corporate bonds recovered from distressed levels, supported by the Federal Reserve’s (Fed) massive stimulus efforts, helped the broad Bloomberg Barclays US Aggregate Bond Total Return Index advance 2.9% over the quarter, bringing the first-half return to an impressive 6.1%.

    Within fixed income, the most economically sensitive sectors, such as emerging market debt and high yield corporate bonds, paced quarterly gains. High-yield bond credit spreads narrowed significantly, powering the Bloomberg Barclays US Corporate Total Return Index to a 10.2% gain, although credit spreads still remained well above typical expansion norms as the quarter ended. Treasuries and mortgage-backed securities lagged with fractional quarterly gains.

    During the quarter, Fed policymakers maintained the target range for the federal funds rate at 0–0.25%. In the policy statement released at the conclusion of its June 9–10 policy meeting, the Fed emphasized that it did not expect to raise rates until it was clear the economy had effectively navigated the COVID-19 crisis and was on a stable path to recovery. Projections released at the meeting’s conclusion showed a median expectation that the Fed would not raise rates until after 2022.
  • Oil and copper highlight lackluster quarter for commodities overall. The Bloomberg Commodity Index gained just 5.1% during the second quarter, recovering only a small piece of its 23.3% first quarter plunge. Crude oil and copper registered very strong gains of more than 20%, benefiting from the economic reopening, relatively strong performance by China’s economy, and a weaker US dollar. Gold, which attracted some safe-haven demand and benefited from massive monetary stimulus, rose 12.1%. Losses for the broad agriculture complex, particularly wheat and livestock, and natural gas weighed on the overall return for the Bloomberg Commodity Index.


The trajectory of the economic recovery remains uncertain, but based on the depth of the contraction and a multi-staged recovery, our 2020 base case forecast calls for a 3–5% contraction in US gross domestic product. We expect economies in Europe to contract more than the United States or Japan in 2020. So far, China has led the way out of the global crisis in terms of containing the virus and reopening its economy.

As the second half of the year began, stocks may have been pricing in a steady economic recovery beyond 2020 that may be supported if we receive breakthrough treatments to end the COVID-19 pandemic. However, the optimism reflected in stocks also may limit their upside potential over the rest of the year. Our 2020 year-end S&P 500 Index target range is 3,250–3,300, based on a price-toearnings ratio (PE) of just below 20 and a normalized earnings per share (EPS) number of $165.

We expect interest rates to remain at historically low levels, but the direction may be higher over the rest of 2020. Our year-end base-case forecast for the 10- year US Treasury yield is 1–1.5%, which would be the lowest level to end a year on record, if realized, and may result in little return from bonds. For more on LPL Research’s outlook for the second half of 2020, please refer to our Midyear Outlook 2020: The Trail to Recovery.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. The economic forecasts set forth in this material may not develop as predicted. All performance referenced is historical and is no guarantee of future results.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments, and exports less imports that occur within a defined territory.

Yield is the income return on an investment. This refers to the interest or dividends received from a security and are usually expressed annually as a percentage based on the investment’s cost its current market value or its face value.

Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.

Small cap is a term used to classify companies with a relatively small market capitalization. The definition of small cap can vary, but it is generally a company with a market capitalization of between $300 million and $2 billion. The prices of small cap stocks are generally more volatile than large cap stocks.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

For a list of descriptions of the indexes referenced in this publication, please visit our website at

This research material has been prepared by LPL Financial LLC.

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