Wealth Management — April 13, 2020
- US stocks fell modestly on Monday as the S&P 500 declined 1.0% to close at 2,762. With the sell-off, the index is now down 14.5% year to date and has corrected 18.4% from the February 19 all-time high.
- After the S&P 500 recorded its largest weekly percentage gain since 1974 last week, US stocks gave back some of the gains in Monday’s trading. While there was no obvious news to point to for Monday’s decline, some consolidation of recent gains may have been due, particularly as we enter first quarter earnings season, which begins in earnest tomorrow with several large-cap companies reporting results. Energy markets were in focus on Monday, following an agreement between large oil-producing nations over the weekend to cut production over the coming months in an attempt to stabilize oil prices; despite the historic agreement, crude oil prices finished Monday little changed, perhaps suggesting the production cut announcement was already priced in.
- Eight of the 11 S&P 500 sectors were lower Monday, with Consumer Discretionary (+1.1%) and Information Technology (+0.2%) outperforming the broader market, while Financials (-3.6%) and Real Estate (-4.6%) lagged.
- Rates were slightly higher across the curve, with the yield on the 10-year rising to 0.76% as of the 4 p.m. equity close. The yield curve steepened, as 10-year rates rose more than 2-year rates. WTI finished modestly lower on the session, while gold rose over 1%; the US dollar was modestly lower, as measured by the US Dollar Index.
US stocks fell 1.0% on Monday as the S&P 500 closed at 2,762. The index experienced its largest weekly gain in over 40 years last week when it climbed over 12% in just 4 trading days (markets were closed on Friday). On Monday, however, equity markets gave back some of those gains, as markets look ahead to earnings season, which is set to begin with a slew of large-cap banks scheduled to report results in the coming days. With policymakers offering unprecedented stimulus in response to the economic crisis and as glimmers of hope emerge as it relates to the current health crisis, markets have rallied in recent weeks, with the S&P 500 recovering roughly half of the sell-off from the February high to the March low. Over the weekend, it seemed more good news came from OPEC+, as major oil-producing nations agreed to cut production in an effort to stabilize oil prices, which at near 20-year lows, have also been a sore spot for markets this year. While crude prices finished Monday little changed, perhaps suggesting the production cuts were priced in, a reduction in crude supply should help bring stability to oil markets, which have been a recent driver of volatility. While news flow has certainly improved in recent weeks, focus will return to fundamentals and the economic and corporate impacts of the global pandemic as earnings season gets underway in the US, with several large-cap banks slated to report results on Tuesday morning.
Given the risks presented by the COVID-19 pandemic, uncertainty remains elevated. The global economy has likely slid into recession and the negative economic effects of the pandemic have become more tangible in recent weeks, as unemployment has spiked and consumer and corporate activity has fallen dramatically. Importantly, however, policy makers have acted, and record levels of stimulus should help ease the burden the current crisis is putting on households, businesses and the economy at large. A one-two punch of monetary and fiscal policy is being delivered in the US, as policy makers confront the current economic challenges. On the monetary front, the Fed has gone to extraordinary lengths to provide liquidity and stabilize fixed income markets. On the fiscal front, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law late last month; the CARES Act calls for $2 trillion+ in federal assistance and loans for those individuals, businesses and organizations most affected by the “sudden stop” in economic activity caused by the spread of the coronavirus. US policy makers have acted aggressively to address the challenges posed to the economy currently, and ultimately this policy response should help drive an economic recovery once the current health crisis is resolved.
While markets have struggled for much of the past eight weeks as the virus and its economic-related impacts have spread across the globe, decisive action from US policy makers may have changed the tide; the S&P 500 has now rallied ~24% from the March 23 intra-day low. This comes after a period in which the S&P 500 failed to rally in consecutive sessions in more than a month of trading. That said, investors should be prepared for the market to remain volatile in the coming weeks, particularly given the nature of the current market sell-off, which has been driven, in part, by anxiety over the unknown as it relates to the spread of the coronavirus.
The dual shocks of coronavirus and the collapse of OPEC-plus, causing oil prices to fall dramatically, are likely to push the global economy into recession over the next 1-2 quarters, ending the 11-year business cycle. However, the swift and furious bear market sell-off since the S&P 500 all-time high on February 19 leaves most asset classes already fully discounting that outcome. Furthermore, we are anticipating an increasingly coordinated “do whatever it takes” stance from global policymakers who are likely to deliver both monetary and fiscal stimulus that should stabilize things as we navigate the human disruption and health-related parts of the crisis. On the other side of the recession, we see potential for a global recovery. Green shoots were already visible outside the US, and inside the US, the foundational health of the consumer has never been stronger to weather a recession, i.e., low unemployment, strong balance sheets and housing market with momentum. Consequently, in recent weeks the GIC has reduced exposures to long-duration Treasuries and began rebuilding exposure to US large-cap growth, US small/mid-cap stocks, US credit and commodities. While we believe the current equity market correction constitutes a cyclical bear market within a longer-term equity bull market, the GIC believes a new multi-year bear market in fixed income has begun. The next leg of the secular bull market in equities is unlikely to see the same leaders as the past decade—namely Technology and Consumer Discretionary stocks. Instead, the GIC sees Financials, Industrials and Health Care stocks likely to outperform. Volatility over the next few quarters should be exploited frequently to rebalance portfolios to strategic asset allocations.
Market data provided by Bloomberg.
Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.
NASDAQ Composite Index: A broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market.
S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
US Trade-Weighted Dollar Index: A weighted average of the foreign exchange value of the US dollar against a subset of the broad index currencies that circulate widely outside the US.