Lopsided Equity Rally Highlights Growing Market Risks

Global equities rebounded sharply in the second quarter, driven by massive stimulus efforts and progress in the fight against the coronavirus. But investors face new risks in the third quarter as companies and countries count the costs of the pandemic and cope with the threat of a second wave of contagion.

After a first-quarter crash, stocks bounced back in April, May and early June as many countries gradually reopened their economies for business (Display, left). Toward quarter-end, returns moderated slightly amid concern that infection rates were increasing. While elevated volatility persisted, the MSCI World jumped 18.5% in the second quarter, leaving it down 5.3% since the beginning of the year. US stocks led in developed markets; Japanese and UK stocks underperformed (Display, right).

Between Relief and Confusion

This rebound elicited mixed emotions. Investors were reassured that the 20% drop in global equities during the first quarter proved temporary. It also reinforced a timeless investing lesson on staying calm during a market panic. By selling during a crash, investors risk locking in losses and sacrificing recovery potential because it’s almost impossible to time market inflection points with precision.

But risks abound. Market performance late in the quarter indicated that rising COVID-19 case numbers can quickly trigger a correction. Even though macroeconomic data is improving, the global economy is undergoing its biggest recession in modern history. Nasty surprises in company results and stock returns can be expected.