Wealth Management — April 24, 2020
What Happened in the Markets?
- US stocks rallied on Friday as the S&P 500 rose 1.4% to close at 2,837. With the rally, the index is now down 12.2% year to date and has corrected 16.2% from the February 19 all-time high.
- US stocks ended the week on a high note, as an afternoon rally sent the major averages sharply higher on Friday. With the rally, the S&P 500 finishes the week down 1.3%, as markets reacted to a slew of mixed earnings reports and global economic data, alongside a historic crash in crude prices. Another round of fiscal stimulus also cleared through Washington this week, with the bulk of this nearly $500 billion package going to the Paycheck Protection Program (PPP), which had been set up to provide loans and assistance to small / medium-sized businesses, but had quickly exhausted its original funding mandate earlier this month given overwhelming interest in the program.
- All 11 S&P 500 sectors were higher Friday, with Information Technology (+2.1%) and Materials (+1.6%) outperforming the broader market, while Real Estate (+0.3%) and Energy (+0.2%) lagged.
- Rates were slightly lower across the curve, with the yield on the 10-year falling to 0.59% as of the 4 p.m. equity close. The yield curve was virtually unchanged. WTI oil rose 3% to $17 per barrel, while gold fell 0.2%. The US dollar was modestly lower, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks rose on Friday as the S&P 500 gained 1.4%. With Friday’s rally, the S&P 500 still fell slightly on the week, down 1.3%. The week began with a shock to financial markets as the May WTI oil futures contract price fell below $0 for the first time in history on the heels of a production glut and tapped out storage capacity. Treasury rates fell sharply in the beginning of the week amid the oil collapse, but have since rebounded, closing out Friday’s session just below 0.60%. Outside of oil, corporate fundamentals remain in focus as next week will mark the busiest week of earnings season, with 39% of S&P 500 companies reporting. So far, earnings reports have done little to provide clarity around the current environment, with many corporates pulling their guidance given the disruption in the economy today, leaving the 2020 earnings picture largely muddled. The fact that stocks have been resilient in recent weeks despite this cloudy earnings outlook may point to a market that is looking past near-term disruption and instead looking toward what earnings could look like in a more normalized environment. Washington was also in focus this week, as a fresh round of stimulus was enacted on Friday, with the latest $484 billion stimulus package providing additional funds for small business support.
With today’s 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 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.