Wealth Management — April 14, 2020
What Happened in the Markets?
- US stocks rallied sharply on Tuesday as the S&P 500 climbed 3.1% to close at 2,846. With the rally, the index is now down 11.9% year to date and has corrected 16.0% from the February 19 all-time high.
- A sharp rally in technology and internet stocks led the market higher on Tuesday, and with the rally, the tech-heavy NASDAQ 100 Index is now roughly flat on the year to date. Tuesday’s rally came despite weakness in Banks and Energy stocks; the former sold off as earnings season kicked off with several banks’ results this morning while the latter traded lower with crude oil, as the WTI crude oil price again tested the $20 / barrel level.
- Ten of the 11 S&P 500 sectors were higher Tuesday, with Consumer Staples (+4.2%) and Consumer Discretionary (+4.2%) leading the day’s gains, while Financials (+0.3%) and Energy (-0.5%) lagged the broader market.
- Rates were slightly lower across the curve, with the yield on the 10-year falling to 0.75% as of the 4 p.m. equity close. The yield curve was virtually unchanged. WTI oil finished sharply lower on the trading session, falling over 7% toward $20 per barrel, while gold rose 0.7%; the US dollar was modestly lower, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks rallied sharply on Tuesday, with the S&P 500 finishing the session near its highs for the day, up 3.1%. With Tuesday’s rally, the index now sits roughly halfway between the February 19 peak and the March 23 low. Stocks have been on a tear in recent weeks as signs of stabilization in new-case growth in several COVID-19 hot spots have emerged, helping lift sentiment and market prices following a historic slide off of the February S&P 500 all-time high. While optimism has returned to Wall Street, and any good news as it relates to the virus is welcome, the health crisis remains far from over and volatility likely remains elevated in the near term as financial markets attempt to price in the risks of a sudden-stop recession against what a potential recovery could look like later this year or next. Given elevated uncertainty as a result of the current health crisis, markets will be paying particularly close attention to commentary from corporate management teams this earnings season for guidance on what the coming quarters could look like. To that extent, several large-cap banks reported results Tuesday morning, and early results were mixed, as bank stocks largely opened the day higher, but gains were faded with the large-cap bank stocks ending the session down more than 2%.
The S&P 500 has now recovered roughly half of the losses from the February/March slide, and has experienced both a 20%+ bear-market decline and a 20%+ bull-market rally in the span of just eight weeks. This volatility perhaps is unsurprising, as the range of potential outcomes for the economy looking forward is wide, given near unprecedented headwinds posed by the COVID-19 pandemic alongside near unprecedented levels of stimulus coming from governments and central banks. 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.
The Global Investment Committee’s Outlook
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.