The 1% Move Report

Wealth Management — April 29, 2020

• US stocks rallied sharply on Wednesday as the S&P 500 rose 2.7% to close at 2,940. With the rally, the index is now down 9% year to date and has corrected 13.2% from the February 19 all-time high.
• Stocks rallied overnight following better-than-expected results from one of the tech giants yesterday afternoon, and gains were added to this morning as reports surfaced that a high-profile experimental COVID-19 treatment currently under development was showing encouraging early results. The Federal Reserve was also in focus with the FOMC announcement Wednesday afternoon, though the markets’ reaction was muted following the Fed’s announcement, which largely went as expected, with the Fed keeping its policy rate at the 0%–0.25% lower bound, and committing to continued asset purchases as needed.    
• Nine of the 11 S&P 500 sectors were higher Wednesday, with Energy (+7.4%) and Communication Services (+5.1%) outperforming the broader market, while Consumer Staples (-0.4%) and Utilities (-0.9%) lagged.
• Rates were mixed across the curve, with the yield on the 10-year virtually unchanged at 0.61% as of the 4 p.m. equity close. WTI oil rose to over $15 per barrel, while gold rose 0.4%. The US dollar was modestly lower, as measured by the US Dollar Index. 

US stocks rose sharply on Wednesday as the S&P 500 gained 2.7%. With Wednesday’s rally, the S&P 500 is now at its highest level in 7 weeks. Markets opened higher Wednesday morning as tech shares rallied on the back of better-than-expected results from one of the tech giants. Broader market sentiment was further lifted as reports surfaced that early data from trials of a high profile experimental COVID-19 treatment were showing encouraging results, raising hopes that the efforts to produce an effective treatment for COVID-19 could be on the verge of success. Perhaps hard to believe, but on a day where drug headlines and earnings reports drove the markets, the much-anticipated FOMC meeting seemed like an afterthought for markets, with rates and equity markets little changed following the 2 p.m. FOMC release. With the Fed having already cut rates to zero and enacting a slew of measures aimed at restoring liquidity in fixed income markets in recent weeks, little new was expected from the Fed today and the market’s muted post-FOMC reaction reflects this. With the Bank of Japan and the Federal Reserve now out of the way this week, tomorrow markets will look to the ECB who is set to host its regular policy meeting.  

With today’s rally, the S&P 500 now sits just 13.2% below the February 19 all-time high, with the index having retraced 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 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.