The second quarter of 2020 can be characterized as a correction to the market’s overreaction to the economic shock caused by the emerging global pandemic that dominated the market the end of the first quarter.  A very strong second quarter stock market combined with a weak economy is counter-intuitive, unless viewed as a correction to the panic selling that dominated the stock market at the end of the first quarter.

Focusing on the bounce back of stock market “averages” misses most of the story.

Trading values of companies in the sectors hardest hit in the first quarter, such as oil companies, did increase dramatically, but remain substantially below their pre-pandemic highs.  Companies in other sectors, such as consumer staples, saw a decline against the gains they enjoyed at the end of the first quarter.  Financial companies, especially banks, experienced a continued decline during the second quarter.  Utilities also continued a decline.  Internet based companies and companies focused on new economies in robotics and artificial intelligence benefitted greatly from an expected increase in demand.  The run to gold, presumably as a risk control measure, continued.

Society, governments, companies and people adapted to the changed environment.  Stock markets can be expected to ultimately provide a rational response so that companies that appear to have only short-term earnings declines or actual earnings increases from the pandemic should have their stock prices recover and rise over the mid to long term.

Commodities such as oil and copper rose considerably in the second quarter as parts of the economy continue to function despite the pandemic. Sectors such as information technology and health care are receiving a great deal of investor attention given their direct importance to mitigating the pandemic’s effects.

Short term interest rates remained anchored close to zero because of central bank policies to promote economic growth or minimize corporate or personal debt stress.  The imposed low interest rate environment will lead investors to search for income and safety other than through fixed income investments.  High quality companies will be the targets of individual and institutional investors.

Long term investors will have experienced unprecedented volatility in prices but should remain soundly invested in a diversified, high yielding portfolio of companies that can be expected to remain sustainable after the pandemic.  We must ask, as always, are there segments of the economy that are no longer sustainable and are there segments of the economy that are becoming even more important to our collective success?

Focusing long-term investments on the leading companies in the most sustainable industries has never been more obvious.