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US equity markets with strongest quarterly performance

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Equity markets recorded strong returns over the second quarter. The 20 per cent quarterly return recorded by the S&P 500 as at the end of June was the strongest quarterly performance in more than two decades. Close behind, European markets gained 18 per cent since end of March, settling 16 per cent below the peak. The recovery across US equity markets was stronger in comparison, with the S&P 500 ending the second quarter only eight per cent below its yearly high.

On a sector level, the technology sector remained the best performer for the quarter, across both regions while cyclical stocks outperformed on a relative basis. Consumer discretionary, industrials and materials were among the sectors recording double digit gains over the quarter.

The significant gains can be largely attributed to the unprecedented level of policy action. From a fiscal front, the US splurged on a $2 trillion aid package which saw a distribution of coronavirus stimulus checks directly to Americans, increased lending to small businesses through the Paycheck Protection Programme and added $600 per week of federal unemployment benefits. In Europe, the European Commission proposed €750 billion Recovery Fund, which is set to revive the Euro area, most especially economies hardest hit by the COVID-19 pandemic. The fund requires the unanimous approval of all EU member states, which is expected to be decided during the upcoming EU summit later this month.

Central Banks across both regions have also played a pivotal role to reduce the cost of capital, through an array of measures to support the economy and functioning of financial markets, including interest rate cuts, and expanding their balance sheet. The Federal Reserve has added $2.8 trillion to its balance sheet, flooding markets with money through the purchasing of Treasuries and mortgage backed securities.

The equity market rally in the US occurred in tandem with the increase in new infection hotspots, especially throughout America. While the primarily hit New York and New Jersey states have managed to contain the spread, states which chose to relax lockdowns relatively quicker are now recording daily new record cases.

Decisions to roll back the economic reopening implicitly slow the economic recovery. On the flip side, the acknowledgement of the uptick in infection rates and the action taken to contain the outbreak without imposing full lockdowns is a positive. While cases are expected to continue to increase in the US due to the lag between mitigation efforts and their effectiveness, the introduction of new restrictions lowers the risk of going back to an uncontrollable spread of covid-19.

Albeit US equity markets outperformed European equity indices on a quarterly basis, a breakdown of monthly returns gives light to a preference towards Europe mid-way through the quarter. The Eurostoxx 50 outperformed the S&P 500 close to five per cent over the last two months of the quarter. While considering that the virus outbreak hit Europe earlier than the US, the recent rotation to Europe can be attributed to better virus control and economic reopening relative to the US, as new infection rates remained low since lockdown measures were lifted.

Despite the optimism across equity markets, the lack of guidance from company management underscores the lack of clarity ahead of earnings season, which is set to start next week. As things stand, the path for earnings recovery still has a long way to go in order to catch up with the rapid recovery priced in the equity markets.

Disclaimer: This article was issued by Rachel Meilak, CFA equity analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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