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Wilshire Funds Management Quarterly Market Commentary - 2Q 2020

Economic Highlights


Webinar Replay

 Second Quarter 2020
Market Update
Presented by Josh Emanuel, CIO, Wilshire Funds Management.

GDP: Real GDP was down -5.0% during the first quarter of 2020 as restricted activity due to the Coronavirus weighed heavily on economic growth. The main detractor was personal consumption, the largest component of GDP, which was down -6.8% for the quarter. Business spending was down -6.4% on lower fixed investment and the largest inventory drawdown since 2009. Economists are currently forecasting a much larger, double-digit fall in Real GDP for the second quarter of 2020. Source: Department of Commerce (BEA)

Interest Rates: The Treasury curve was little changed during the quarter with an approximately 10 basis point drop in the intermediate range and a small uptick in the 30-year yield. The 10-year Treasury was down slightly, after falling 122 basis points during Q1, and finished at 0.66%. The Federal Open Market Committee met twice during the quarter with no changes to the Fed-funds rate, which is effectively zero. Their forecast is for no rate changes until at least 2022. Source: U.S. Treasury

Inflation: Consumer price changes have turned negative this year while still up modestly for the past twelve months. The Consumer Price Index was down -1.3% for the three months ending May and up 0.2% for the one-year period. The 10-year breakeven inflation rate increased during the second quarter to 1.34% in June versus 0.87% in March. Source: Department of Labor (BLS), U.S. Treasury

Employment: Coronavirus restrictions wreaked havoc on the employment picture during the past three months. Job losses equaled 1.4 million in March and more than 20 million in April. Source: Department of Labor (BLS)

Housing: Home prices have been moving higher with the S&P Case-Shiller 20-city Home Price Index up 1.3% for the three months ending April 2020. During the past 12 months, the Index is up 4.0%. Source: Standard & Poor’s

U.S. Equity Markets

Despite the negative economic data, the federal stimulus response and quickly evolving health predictions helped propel equities higher. The U.S. stock market, represented by the Wilshire 5000 Total Market IndexSM, was up 21.94% for the second quarter of 2020. Although rebounding strongly, equities are still down -3.30% for the year. All eleven major sectors were in positive territory for the quarter. The best performing sector was Consumer Discretionary (+37.0%), followed closely by Energy (+32.6%) and Information Technology (+31.6%). Although parts of the country have begun to loosen Coronavirus-related restrictions, considerable uncertainty about 2020 economic growth prospects remain. In fact, more than a dozen states have paused or reversed their reopening plans. According to a report by the Federal Reserve Bank of Philadelphia, expectations for real GDP growth this year are approximately -5% with an unemployment rate remaining above 10%.

U.S. Equity

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Wilshire 5000 Total Market IndexSM 2.34 21.94 -3.30 6.78
Standard & Poor’s 500 Index 1.99 20.54 -3.08 7.51
Wilshire 4500 Completion IndexSM 3.87 30.36 -6.02 0.72
MSCI USA Minimum Volatility -1.06 12.86 -6.49 0.50

Source: Bloomberg

U.S. Equity by Size/Style

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Wilshire U.S. Large Cap IndexSM 2.28 21.64 -2.29 8.22
Wilshire U.S. Large Cap Growth IndexSM 3.39 27.30 5.49 18.31
Wilshire U.S. Large Cap Value IndexSM 0.99 15.56 -9.98 -1.46
Wilshire U.S. Small Cap IndexSM 3.04 25.63 -13.82 -7.70
Wilshire U.S. Small Cap Growth IndexSM 3.17 29.92 -6.65 0.00
Wilshire U.S. Small Cap Value IndexSM 2.89 21.27 -20.52 -14.88
Wilshire U.S. Micro Cap IndexSM 4.70 28.97 -14.67 -12.13

Source: Bloomberg

Given the importance of consumer spending to real economic growth, unemployment statistics are worth watching closely as the year continues. A surprising employment report in May speaks well for an eventual recovery. Additionally, unemployment claims are beginning to point towards a bottom and perhaps the beginning of a recovery, albeit off extremely weak levels. Other signals are not as encouraging. The ratio of employed persons to the overall population stands at 52.8%, down nearly 10%-points from the beginning of the year. Taken together, it seems that robust fiscal stimulus programs, targeting both households and businesses, are working well. However, fiscal support has not yet been renewed past this summer and may still prove to be necessary.

Unemployment Claims (Millions)

Unemployment Claims (Millions)
Source: Federal Reserve

Non-U.S. Equity Markets

Equity markets outside of the U.S. also enjoyed a strong rebound during the quarter, although they did trail the U.S. market. Economic releases showed that the U.K. suffered its worst contraction in more than 40 years as real GDP shrank -2.2% in the first quarter. Employment data shows that nearly a third of the U.K.’s workforce is on furlough with the government supporting a majority of those employees’ wages. Although the 19-nation euro region is expected to shrink more than -8% this year, there are some early signs of a recovery. Survey data shows that economic sentiment is returning, although is depressed versus earlier this year. Inflation statistics in Germany indicate that service providers have been able to successfully raise prices to counter Coronavirus-related restrictions. China’s economic recovery continued during the second quarter due, in part, to government support policies and the reopening of some overseas markets. The official Purchasing Manager’s Index for China indicates that manufacturing in the country expanded for the fourth straight month after a dramatic slowdown.

Non-U.S. Equity

  USD (%) Local Currency (%)
MSCI ACWI ex USA 4.52 16.12 -11.00 -4.80 3.71 13.90 -9.04 -2.71
MSCI ACWI ex USA Minimum Volatility 1.84 8.64 -9.24 -5.37 1.07 6.69 -8.23 -4.63
MSCI EAFE 3.41 14.88 -11.34 -5.13 2.64 12.60 -10.53 -4.24
MSCI Emerging Markets 7.35 18.08 -9.78 -3.39 6.63 16.74 -5.50 1.37
MSCI ACWI ex USA Small Cap 3.26 22.83 -12.80 -4.34 2.41 20.16 -10.67 -2.12

Source: Bloomberg

Fixed Income Markets

The U.S. Treasury yield curve was little changed during the quarter after a dramatic drop in Q1. Although the entire curve is below 1.50% it also is steeper than it has been in two years. The 10-year Treasury yield ended the quarter at 0.66%, down just 4 basis points from March. The Federal Open Market Committee met twice during the quarter, as scheduled, with no change to their overnight rate, which they expect will be near zero until at least 2022. Chair Jerome Powell attempted to temper expectations by stating that, “The path forward for the economy is extraordinarily uncertain.” Alongside the rally in equities, credit spreads tightened significantly during the quarter, as evidenced by the double-digit return within the high yield market.

U.S. Fixed Income

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Bloomberg Barclays U.S. Aggregate 0.63 2.90 6.14 8.74
Bloomberg Barclays Long Term Treasury 0.13 0.25 21.20 25.41
Bloomberg Barclays Long Term Corporate 2.52 11.36 6.34 13.79
Bloomberg Barclays U.S. TIPS 1.12 4.24 6.01 8.28
Bloomberg Barclays U.S. Credit 1.83 8.22 4.82 9.07
Bloomberg Barclays U.S. Corporate High Yield 0.98 10.18 -3.80 0.03
S&P/LSTA Leveraged Loan 1.14 9.70 -4.61 -1.99

Source: Bloomberg

Global Fixed Income

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Bloomberg Barclays Global Aggregate 0.89 3.32 2.98 4.22
Bloomberg Barclays Global Aggregate (Hedged) 0.50 2.42 3.90 6.07
Bloomberg Barclays EM LC Gov’t Unvrsl 0.81 3.93 -1.05 1.53
Bloomberg Barclays EM LC Gov’t Unvrsl (Hedged) -0.25 2.00 3.61 6.55

Source: Bloomberg

Real Estate and Commodity Markets

Real estate securities were up during the second quarter in both the U.S. and abroad. The rebound was broad-based, including sectors that have struggled such as regional shopping malls and shopping centers. Commodity results were positive for the quarter as crude oil jumped 91.7% to $39.27 per barrel. Natural gas prices were up 6.8%, ending the quarter at $1.75 per million BTUs. Midstream Energy was among the best performing market segments, up 32.6% for the quarter. Finally, gold prices were up 13.7%, the seventh straight positive quarter, and finished at approximately $1,801 per troy ounce.

Real Assets

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Wilshire US Real Estate Securities IndexSM 2.28 10.57 -17.89 -12.39
Wilshire Global Real Estate Securities IndexSM 2.24 9.49 -20.30 -15.15
Bloomberg Commodity 2.28 5.08 -19.40 -17.38
S&P Global Infrastructure -1.24 13.87 -19.35 -14.76
Alerian Midstream Energy -4.15 32.63 -29.60 -29.45

Source: Bloomberg


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