Wealth Management — April 15, 2020
What Happened in the Markets?
- US stocks fell on Wednesday as the S&P 500 declined 2.2% to close at 2,783. With the sell-off, the index is now down 13.9% year to date and has corrected 17.8% from the February 19 all-time high.
- Stocks gave back some of Tuesday’s gains, while Treasuries rallied sharply as markets digested a number of economic and earnings releases Wednesday morning, which on balance and perhaps unsurprisingly, painted a downbeat picture for the US economy. Weakness in crude oil prices again also appeared to weigh on markets, with the US benchmark WTI crude oil contract dropping to 18-year lows during Wednesday’s trading, though a late afternoon rally did see oil prices recover to trade back above $20 / barrel.
- All 11 S&P 500 sectors were lower Wednesday, with Health Care (-0.5%) and Communication Services (-1.0%) outperforming the broader market, while Materials (-4.5%) and Energy (-4.7%) lagged.
- Rates were sharply lower across the curve, with the yield on the 10-year falling to 0.63% as of the 4 p.m. equity close. The yield curve flattened, as 10-year rates fell more than 2-year rates. WTI oil finished modestly higher on the trading session, bouncing off lows of the session to finish above $20 per barrel, and gold fell 0.3%; the US dollar was modestly higher, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks declined on Wednesday, as the S&P 500 fell 2.2%. Wednesday’s sell-off reversed some of Tuesday’s 3%+ index rally. Though perhaps not the direct catalyst for Wednesdays sell-off, a slew of economic releases Wednesday morning largely came in worse than expected, underscoring the extent of weakness in the US economy currently. The Empire Manufacturing Index, a measure of manufacturing activity in the state of New York, fell to its lowest level ever at -78, while Retail Sales also fell to the lowest month-over-month levels ever recorded, at negative 8.7%. While the data is jarring, it is perhaps unsurprising given the “sudden stop” in economic activity we are currently witnessing. That said, even with Wednesday’s decline, the S&P 500 has still rallied 24% from the March lows, and in recent weeks stocks have been soaring as signs of stabilization in new-case growth in several COVID-19 hot spots have emerged, helping lift sentiment. While economic data releases in the coming weeks are likely to point to a dramatic slowdown and deep recession in the US, it will be important to watch how markets react to this data, as much of the bad news may already be in the price given the historic slide in February/March. To that extent, Thursday will be another big day for global economic data, with the weekly jobless claims report in the US, and the 1Q China GDP report on the docket. Earnings season will also be in focus, as markets look to corporate management teams for guidance on what the rest of the year might hold, given the unprecedented disruption companies are facing today.
Even with Wednesday’s sell-off, the S&P 500 sits roughly halfway between the February 19 all-time high and the March 23 intra-day low, 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.