Accommodative monetary and fiscal policy actions of historic scope and magnitude, paired with better-than-expected incoming economic data, drove a notably strong market rally in the second quarter, as investors breathed a sigh of relief following the first quarter’s rout. Despite mounting evidence of a potential second wave of COVID-19 and an associated wave of selling pressure, the surge in liquidity during the quarter helped boost financial markets during the quarter. U.S. large cap returns had their strongest quarterly gain since 1998—20.5% for the S&P 500 Index—essentially reversing the first quarter’s decline of 19.6%, the worst quarterly performance since 2008.
The Federal Reserve is getting much of the credit for the strong market performance. The combination of lower interest rates and the purchasing of corporate bonds on the open market ($3 trillion so far in 2020!) reduced the risk of corporate bankruptcies and gave confidence to equity investors. The staggering amounts involved also have created a fear of looming inflation, sending gold prices to all-time highs. There were similar fears of inflation following the Great Financial Crisis of 2008, but it failed to materialize. Some will argue this time is different, but the Federal Reserve has done an admirable job managing inflation over the years.
Alan Bergin is the Senior Vice President of Fund Evaluation Group in Dallas, TX, the Foundation’s consulting firm.