June 2020 – Bond Market Review

The National Bureau of Economic Research has officially determined that the US economy entered a recession in February 2020, following a 128-month economic expansion. First quarter GDP declined 5.0% and the decline in second quarter GDP is expected to be more severe. More than 42.6 million people have filed for unemployment since mid-March, though many of those jobs are expected to return, and we saw some evidence of this in the May employment report. Economic data remains weak but is showing early signs of improvement, which suggests that the recession (which is the period between the peak of economic activity and the trough) may technically already be over. Market participants expect the economy will continue to improve in the second half of the year, although the consensus forecast implies that the level of economic activity is likely to remain below pre-pandemic levels at year-end. We believe the path to recovery will be bumpy and financial markets may be poised for increased volatility in the coming months, particularly leading up to the US Presidential election. In our view, both fiscal and monetary relief have fueled the recovery thus far, but some of the fiscal programs (i.e. direct household payments and expanded unemployment benefits) are temporary. While we expect additional fiscal relief is likely, an expansion of existing fiscal relief programs may be met with increased resistance from policymakers as economic data improves. At the end of May, the S&P 500 index was up roughly 36% from the March 23rd low, and down just 5.8% on a year-to-date basis. As of yesterday’s market close, the S&P 500 index was positive for the year.

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