Wealth Management — April 27, 2020
What Happened in the Markets?
- US stocks rallied on Monday as the S&P 500 rose 1.5% to close at 2,878. With the rally, the index is now down 10.9% year to date and has corrected 15% from the February 19 all-time high.
- Stocks began the week on a high note, ahead of what is to be a busy week for central bankers and corporate earnings. The Bank of Japan set the tone for the week announcing further stimulus overnight while the Federal Reserve and the European Central Bank are scheduled to hold their policy meetings later this week. On the earnings front, the busiest week of earnings season gets underway with nearly 40% of the S&P 500 set to report this week, including several of the large technology companies. Small caps were notable outperformers on the session, with the Russell 2000 rallying nearly 4%.
- All 11 S&P 500 sectors were higher Monday, with Financials (+3.6%) and Real Estate (+3.0%) outperforming the broader market, while Communication Services (+0.6%) and Consumer Staples (+0.3%) lagged.
- Rates were mixed across the curve, with the yield on the 10-year rising to 0.66% as of the 4 p.m. equity close. The yield curve steepened, as 10-year rates rose while 2-year rates fell slightly. WTI declined sharply, down over 20% to $13 per barrel, while gold fell 0.7%. The US dollar was modestly lower, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks rose on Monday as the S&P 500 gained 1.5%. With Monday’s rally, the S&P 500 is now at its highest level in 6 weeks. The Bank of Japan set the tone for what is to be a busy week of central bank announcements, by declaring more stimulus, including expanding its quantitative easing measures by doubling the size of its corporate bond-buying programs and pledging to buy as many government bonds as needed without any limits. With the BoJ out of the way, the Federal Reserve (Wednesday) and European Central Bank (Thursday) will be up next as markets look to policy makers for stimulus given the current challenges facing the global economy. Rates were higher on the long end today, with the 10-year Treasury climbing to 0.66%; even with the move higher in rates, crude oil sold off again on Monday. Financials were notable outperformers on the session, rallying 3.6%, while small-caps also outperformed sharply, as the Russell 2000 was up nearly 4% on the day. Recent leaders in technology and internet stocks were laggards to start the week, ahead of what is to be a busy week of corporate earnings reports, with nearly 40% of S&P 500 companies scheduled to report results this week, including several of the large technology companies.
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 have 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.