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EDGE WEALTH MANAGEMENT LLC

 

July, 2020

 

First and foremost we hope all of you and your families are healthy during these very trying times. We at Edge Wealth Management are now in our 14th year of managing client assets. Many of you reading this have been with us since our inception. In 14 years of writing newsletters, this one is by far the most difficult. As we all grapple with the physical, emotional and economic carnage of a global pandemic, discussing market conditions seems trivial compared to the challenges we all currently face.

 

2020 began where 2019 left off as risk assets continued to rally behind an accommodative Federal Reserve and a relatively strong economy. Equities continued their march higher, with the S&P 500 index peaking at 3393 in February, a +4.5% gain year to date. Interest rates remained steady, dropping slightly with the U.S. Treasury 10-year note hovering near 1.70%.  As mentioned in our January letter, we were cautiously optimistic regarding returns for risk assets in 2020. We did not expect another outstanding year similar to 2019, although positive returns for both equities and fixed income seemed plausible given the economic backdrop. Those expectations changed in dramatic fashion with the onset of Covid-19 and it’s spread across the globe. The SPX 500 plummeted -36% from the peak on February 19th to the bottom on March 23rd. Bond yields followed suit, falling close to 150 basis points on the U.S. 10 Year Treasury to historically low levels as a “flight to quality” took hold. Almost more surprising than the selloff in equities was the ensuing rally from the March low until now with the SPX 500 recouping most of its losses. As of quarter end, the SPX 500 was only down -4% year to date. Corporate bond spreads which had widened dramatically as default risk rose also recovered most of their losses. The rally across almost all asset classes was driven by unprecedented action from The Federal reserve. As we mentioned in our April commentary, The Fed assumed a “whatever it takes” mentality to shore up repo and credit markets, expanding their balance sheet by 1.3 trillion over a two week period.  In addition, 2.2 trillion in fiscal spending with the possibility of more in the future has fueled a massive rebound in risk assets.

 

One index such as the SPX 500 does not paint a clear picture of the true damage that was levied upon most sectors of the market.  Technology, which represents 26% of the SPX 500 index has been a standout performer thus helping to reflate the index.  In comparison, The Dow Jones Industrial average finished the first half of 2020 -9.5% while the NYSE Composite, an index of over 2000 companies ended Q2 -14.5%.  Small Cap equities fared even worse at -18.5%. REITS and Utilities which had been safe havens were not immune to the carnage, dropping -11% and -13% respectively.  Many technology and other “stay at home” stocks have benefitted from the pandemic while the “re-opening” or value sectors such as banks, energy and industrials continue to languish.  Without a vaccine, this trend will likely continue. We would expect the trend to reverse with money coming out of tech and into value stocks when a cure for Covid-19 is found. Fortunately, the response from pharmaceutical companies around the world has also been unprecedented with several potential vaccines already in human trials. 

Our view going forward is that the equity markets bottomed on March 23rd and we don’t anticipate returning to those levels. With bond yields at historic lows, fixed income for the most part is not an attractive alternative to common and preferred stocks. Investment grade 5yr corporate debt yields approximately 1.30%. Many high quality equities boast dividend yields that are nearly double 5-10 year maturity investment grade bonds. In addition, there is close to $5 trillion in cash sitting in money market accounts earning close to zero interest. Although a reasonable cash cushion is prudent during times such as this, at some point, the excess cash will flow back into risk assets. Again, it will probably require more positive news on the vaccine front before that happens. In the meantime, we believe interest rates will remain low and stocks will be range bound. Having said that, we think volatility is here to stay and we expect a bumpy ride for the foreseeable future as the country struggles to reopen.  We thank you for your continued support during these unprecedented times.


Regards,

Edge Wealth Management

 

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s, or be suitable for your portfolio.  Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Edge Wealth Management, LLC.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.