The short period during which the U.S. stock market went into a bear market decline of -34%, bottomed, and then advanced +39% has been remarkable. The stock market decline was matched by a rapid change in the economy, contracting into a recessionary environment with record unemployment figures. While the US economy is far from full recovery, there are some signs of improvement. For one, jobs data has been in focus and continues to improve at a better than expected pace.

After two-quarters of results, the S&P 500 Index returned -3.08%, and the Bloomberg Barclays Aggregate Bond Index returned +6.14%. These two domestic segments of the investment universe have performed relatively well to date. Beyond these two, performance has been measurably weaker. Small companies within the US were -12.93% and international stocks (developed and emerging markets) were -11.34% and -9.78% respectively. Real estate was -14.92%, and commodities were -19.4% through two quarters. Worth noting, when looking at Q1 vs Q2 separately, many of the under-performing areas of Q1 were out-performers during Q2.

Clearly this is one of the unusual times when diversification has underwhelmed.

So, where does the large dispersion in returns come from? In short, the technology-heavy US stock market and Treasury bonds. The U.S. stock market performance has largely been driven by five technology-tilted companies (Microsoft, Apple, Amazon, Google, Facebook). While the stock prices of these companies have performed well, prices are around all-time highs and valuations are elevated (less attractive). Other quality, dividend-paying companies have not experienced a similar magnitude of price increase; however, they remain more attractively priced, and we believe well-positioned moving forward.

Within the bond market, Treasury bonds, which are a safe-haven investment, have been a top-performing segment, mostly due to interest rates decreasing (and prices increasing) to record lows (highs in price). The 10-year Treasury bond now yields 0.67%, which we believe will not keep up with inflation, let alone provide measurable income going forward. In our opinion, this is a reason to diversify into other, higher return potential bond (or yield) investments, especially within the longer-term segments of your portfolio.

You may have heard the phrase: “diversification is the only free lunch”. Although the past months do not completely reflect this, diversification must remain a core principle of wealth management. We think of diversification across investments and, importantly, time periods based on how you plan to live your life. Financial markets change over time, as do your plans, we know this and are prepared to make the necessary adjustments.

Market Comments

Related to stock market concentration risks within the S&P 500, the five largest stocks by market value comprise 21% of the index, which is the highest level since 1978

• These five companies generate only 7% of the revenue and 12% of the earnings of the overall index

• This does not imply an imminent fall in prices, however, highlights the importance of diversification

Strong US economic data provided stock market support late in the week; June job payroll data was released Thursday and was well ahead of expectations

• June non-farm payrolls were up nearly 4.8 million vs the expected 3.1 million; unemployment rate moved down to 11.1%

The airline industry has been heavily impacted by COVID-19 travel reductions/restrictions; the US Treasury Department recently reached an agreement with five airlines for federal loans to stabilize the industry

• TSA travel numbers have been increasing during this economic re-opening period; 626k travelers went through TSA on 7/1, which is about 25% of what occurred a year ago

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