Wealth Management — April 8, 2020
What Happened in the Markets?
- US stocks rallied sharply on Wednesday as the S&P 500 gained 3.4% to close at 2,750. With the rally, the index is now down 14.9% year to date and has corrected 18.8% from the February 19 all-time high.
- With Wednesday’s rally, the S&P 500 is now up 10.5% on the week, as optimism has crept back into markets. Glimmers of hope in the COVID-19 data in recent days have boosted sentiment, as new case growth appears to be stabilizing in several hot spots such as Italy and New York. While too early to draw any conclusions from the data, any good news is welcome as it relates to the virus. Elsewhere in markets, reports suggesting major oil-producing countries could agree to substantial output cuts sent crude oil prices higher, and energy stocks were notable outperformers during the session.
- All 11 S&P 500 sectors were higher Wednesday, with Real Estate (+7.4%) and Energy (+6.7%) outperforming the broader market, while Communication Services (+1.7%) and Consumer Staples (+1.4%) lagged.
- Rates were mixed across the curve, with the yield on the 10-year rising to 0.76% while the yield on the 2-year fell to 0.25% as of the 4 p.m. equity close, resulting in a steepening of the yield curve. WTI oil surged over 10% on the session, while gold was virtually unchanged; the US dollar was modestly higher, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks rallied sharply on Wednesday, as the S&P 500 gained 3.4%, to close at 2,750. With Wednesday’s gains, the S&P 500 is now up 10.5% on the week to date, on track to post strong returns in this holiday-shortened week (the market will be closed on Friday). As glimmers of hope have emerged in the COVID-19 data, with stabilizing new case growth in Italy and a decline in new hospitalization across New York State, markets have taken a more upbeat view in recent sessions. While too early to draw any definitive conclusions from the data, it would appear that the social distancing measures enacted in these hot spots may be working, and ultimately a successful ‘flattening of the curve’ could lead markets to start looking forward to better days, as the economy opens back up. To that extent, it was reported that health experts met at the White House Tuesday night to discuss preliminary plans for what a reopening of the economy and a return to normalcy could look like. After what seemed like an endless string of negative news as it related to COVID-19 in recent weeks weighed on markets, this week’s green shoots in the virus data are encouraging. That said, the health crisis is far from over and across the US new cases of the virus are likely to grow in the coming weeks.
Given the risks presented by the COVID-19 pandemic, uncertainty remains extraordinarily elevated. The global economy has likely slid into recession as a result of the “sudden stop” in economic activity across much of the world and the negative economic effects 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. Last month a one-two punch of monetary and fiscal policy was delivered in the US, as policy makers sought to confront these current economic challenges. On the monetary front, the Federal Reserve 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 threats posed to the economy today and ultimately this policy response should help drive an economic recovery once the current health crisis is resolved.
While markets have struggled for much of the past seven weeks as the virus and its economic-related impacts have spread across the globe, decisive action from US policy makers may have changed the tide; the S&P 500 has now rallied ~26% from the March 23 intra-day low. This comes after a period in which the S&P 500 failed to rally in consecutive sessions in more than a month of trading. That said, investors should be prepared for the market to remain volatile in the coming weeks, particularly given the nature of the current market sell-off, which has been driven, in part, by anxiety over the unknown as it relates to the spread of the coronavirus. To that end, the market is pricing in volatility to remain extraordinarily high, as measured by the CBOE Volatility Index, or the VIX. The VIX tested its 2008 Financial Crisis highs in mid-March spiking above 80, but has fallen steadily since, and is currently trading below 50. While the VIX coming down from recent highs is an encouraging sign for markets, current levels still imply a near 3% daily average move for the S&P 500 over the next 30 days. From a relative valuation standpoint, equity earnings and dividend yields also look attractive when compared to long-term Treasury rates, suggesting the market has priced in substantial risk, and opportunities may be presenting themselves for long-term oriented investors.
The Global Investment Committee’s Outlook
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.