Wealth Management — April 20, 2020
What Happened in the Markets?
- US stocks declined on Monday as the S&P 500 fell 1.8% to close at 2,823. With the sell-off, the index is now down 12.6% year to date and has corrected 16.6% from the February 19 all-time high.
- Stocks declined modestly to begin the week, with some consolidation perhaps warranted following back-to-back weeks of strong gains. It was a historic day for oil markets, with the May WTI futures contract trading into negative territory, the first time the quoted oil price has traded below $0 in history. Energy and Utilities stocks were among the day’s laggards as oil market disruption comes back into focus. Outside of energy, corporate fundamentals will be in focus this week, as earnings season continues.
- All 11 S&P 500 sectors were lower Monday, with Health Care (-0.8%) and Communication Services (-0.9%) outperforming the broader market, while Real Estate (-3.7%) and Utilities (-3.9%) lagged.
- Rates were lower across the curve, with the yield on the 10-year falling to 0.62% as of the 4 p.m. equity close. The yield curve flattened slightly, as 10-year rates fell more than 2-year rates. WTI oil collapsed on the session, while gold rose 0.8%. The US dollar was modestly higher, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks declined on Monday, as the S&P 500 fell 1.8%. Following last Friday’s close, the S&P 500 had rallied over 28% from the March 23 low in just under a month, and after back-to-back weeks of sharp rallies, perhaps some consolidation is due. Monday’s move comes as markets await more stimulus from Washington, with reports suggesting Congress could be close to a deal to upsize the funds made available through the recently enacted Paycheck Protection Program (PPP), which had exhausted its original funding mandate last week. Oil markets recorded a historic day on Monday, as a plunge in prices saw the May WTI futures contract trade into negative territory for the first time in history. With the May contract set to expire tomorrow, with holders of the contract taking physical delivery of crude oil at the end of the month, a negative price would seem to imply that remaining storage capacity/infrastructure is limited, and thus sellers of crude would essentially pay buyers to take the oil off their hands. The move into negative territory appears largely technical in nature around the contract expiry, and importantly, the international benchmark (Brent) still trades above $25, while the June WTI contract, which will become the front-month contract tomorrow, also trades above $20. Outside of oil markets, corporate fundamentals will be in focus this week as earnings season continues.
Even with today’s sell-off, the recent rally in the S&P 500 leaves the index 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 Global Investment Committee’s Outlook
The dual shocks of coronavirus and the collapse in oil prices 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.