Markets at midyear: what's been, what's ahead

Anthony Saglimbene, Ameriprise Global Market Strategist

Road and farmland with the sun setting behind a tree

As of July 20, 2020


Looking back

  • The S&P 500® Index posted its best quarter of performance since the fourth quarter of 1998.
  • Consumer Discretionary and Technology sectors led markets higher in Q2.
  • Improving economic and mobility trends lifted market sentiment. 


Up ahead

  • An economic recovery could be uneven and choppy through year-end.
  • History suggests mixed results for stock prices through the second half.
  • Review your investment strategy with your Ameriprise advisor.

Data source: FactSet


Looking back

Stocks came out of the gate strong in July. The NASDAQ Composite continued to press new highs, while the S&P 500 Index has been closing in on its Feb. 19 high.

After a 20% decline in the first quarter, the S&P 500 posted a gain of +20.5% in the second quarter, its biggest three-month jump since the fourth quarter of 1998. The Consumer Discretionary sector led stocks higher, propelled by outsized gains in Amazon’s stock price.

The Technology sector also was a stand-out leader in the period, pushed higher by strong gains in the shares of Apple and semiconductor companies. In our view, semiconductors are the transports of the 21st century. They are the brains in almost every product today, and their prospects largely hinge on the strength of the economy and demand for a wide range of products.

Growing optimism over the global economy's return toward normal lifted sentiment on the semiconductor industry as well as the overall stock market during the second quarter. In addition, the price of West Texas Intermediate oil rose over +90%, Treasurys were mostly higher as the yield curve steepened, gold gained nearly +13% and the U.S. dollar declined a little more than -1.5%.

Swift and massive monetary and fiscal stimulus across the world helped lift markets higher in the previous quarter and entrenched the idea of a V-shaped recovery. The Federal Reserve's balance sheet rose nearly $2 trillion over the quarter, ending June at more than $7 trillion in total. This is notable for investors because it demonstrates the strength of the Fed’s policy response to the global pandemic.

At the same time, additional signals helped drive risk assets higher, including stocks:

  • Global COVID-19 cases ebbed lower until late June.
  • High-frequency data such as OpenTable restaurant reservations and community mobility trends showed signs of improvement in May and June.
  • Throughout the second quarter, there was growing optimism toward COVID-19 vaccines and treatments.

However, retail investors generally continued to remain pessimistic about market prospects. But the fear of missing out on higher asset prices after the March 23 market low ultimately prompted some to look beyond their pessimism and move from cash back into stocks.

The here and now

Over the coming weeks, corporate earnings reports will provide investors an opportunity to learn whether the positive economic and mobility trends in May and June translated into improved profit trends. Also, Congress and the White House will wrestle over the next COVID-19 aid package.


Looking ahead

As the second half of the year unfolds, we believe the following:

  • The path forward for stocks largely depends on how the economy responds to an uneven reopening through year-end.
  • Absent a breakthrough in a COVID-19 vaccine or treatment, flare-ups in the virus across economically significant states are likely to hinder overall growth in the coming months.
  • Consumers and businesses may be slower to reengage in regular activities, particularly in areas where COVID-19 trends are worsening.
  • This tug of war between current circumstances and market expectations could create periods of volatility in Q3.

In periods of uncertainty such as the one we’re in now, history can provide investors with some reference points to consider. For example, when the S&P 500 Index was up more than +15% in a quarter — there have been nine such periods since World War II — the Index was always higher and delivered an average return of +9.0% in the subsequent quarter, according to Bespoke Investment Group.

In further evidence for the case of positive forward returns, Ned Davis Research finds that when at least 90% of S&P 500 stocks are trading above their 50-day moving average — a threshold reached May 26 — the benchmark index was always higher one year later for an average return of 17% (includes 19 occurrences since 1967).

Nevertheless, the limitations in this data are that sample sizes are small, history does not guarantee future performance and the S&P 500 was lower through the first six months of this year. Since 1928, the S&P 500 has been negative halfway through the year only 35% of the time, according to FactSet. In those years, returns through the rest of the year were generally subpar, suggesting limited upside for stock prices through year-end.

With the second half of the year underway, investors should check in with their advisors to ensure their portfolios are properly aligned with risk tolerances and are well diversified with high-quality investments.  



Data source for indices and sector graphs: Morningstar Direct, as of July 13, 2020.