Wealth Management — April 17, 2020
- US stocks rallied sharply on Friday as the S&P 500 gained 2.7% to close at 2,875. With the rally, the index is now down 11% year to date and has corrected 15.1% from the February 19 all-time high.
- With Friday’s gains, the index rallied for a second consecutive week and has now closed higher in three of the past four weeks. Optimism has returned to Wall Street as new case growth in several COVID-19 hot spots appears to have stabilized in recent days. Sentiment with regard to the virus received a further boost on Friday, as reports circulated, suggesting a potential COVID-19 treatment may show promise, though it is too early to draw any conclusions as reports so far have been anecdotal. Still, on the margin, this week COVID-19 news flow has been positive, and has allowed several US and global leaders to begin discussing plans to relax lockdowns and re-open the economy in stages in the coming weeks and months.
- All 11 S&P 500 sectors were higher Friday, with Energy (+10.4%) and Financials (+5.6%) outperforming the broader market, while Communication Services (+1.4%) and Information Technology (+1.4%) lagged.
- Rates were mixed across the curve, with the yield on the 10-year rising to 0.64% as of the 4 p.m. equity close. The yield curve steepened, as 10-year rates rose while 2-year rates fell. WTI oil was sharply lower on the trading session, down over 8% and finishing at $18 per barrel, and gold fell 2%. The US dollar was modestly lower, as measured by the US Dollar Index.
US stocks rallied on Friday, as the S&P 500 rose 2.7%. After today’s rise, the S&P 500 finished up 3% on the week. It has been a quieter week with respect to S&P 500 daily moves relative to the past several weeks, but under the surface there has been much to digest, with markets reacting to updates surrounding the health crisis, economic data and the start of corporate earnings season. This week saw another spike in initial jobless claims, though the rate at which claims are increasing appears to be slowing, with this week’s reading the lowest in the past three. China GDP data overnight showed sharp declines in the first quarter, though this was to be expected given the lockdown in place in that country for much of the quarter. Corporate earnings season also kicked off in the US this week, with a number of large-cap banks reporting results; the early read is mixed, with results generally strong, but commentary cautious with regard to what the coming months could look like given elevated uncertainty. Bank stocks largely sold off following earnings reports this week, but rallied sharply on Friday. The S&P 500 has rallied for a second straight week, even in the face of jarringly poor economic data, perhaps suggesting weakness in the data was priced in with last month’s slide, and markets are beginning to look ahead to what the coming months could bring.
With the recent rally, the S&P 500 now sits roughly halfway between the February 19 all-time high and the March 23 intra-day low, with the index having retraced slightly more than half of the February into March sell-off. The index 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 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.