Wealth Management — April 9, 2020
- US stocks rallied on Thursday as the S&P 500 gained 1.5% to close at 2,790. With the rally, the index is now down 13.7% year to date and has corrected 17.6% from the February 19 all-time high.
- With Thursday’s rally, the S&P 500 ends the holiday-shortened week up 12.1%. Optimism has crept back into markets this week as glimmers of hope are appearing in the COVID-19 data, as new case growth appears to be stabilizing in several hot spots such as Italy and New York. Thursday’s rally also appeared driven, in part, by a number of new actions announced by the Federal Reserve, which were particularly well received by credit markets. Oil markets were also in focus again, with a teleconference between OPEC+ members reportedly yielding a production cut agreement, with details likely to be finalized following a broader meeting Friday among G-20 energy ministers.
- Ten of the 11 S&P 500 sectors were higher Thursday, with Financials (+5.2%) and Real Estate (+5.2%) leading the day’s gains, while Information Technology (+0.1%) and Energy (-1.1%) lagged.
- Rates were lower across the curve, with the yield on the 10-year falling to 0.72% as of the 4 p.m. equity close. The yield curve flattened, as 10-year rates fell more than 2-year rates. WTI fell 6% in the session, while gold surged 2.4%; the US dollar was modestly lower, as measured by the US Dollar Index.
US stocks rallied sharply on Thursday, as the S&P 500 gained 1.5% to close at 2,790. With Thursday’s gains, the S&P 500 ends the holiday-shortened week up 12.1%. This marks the strongest weekly performance for the index in more than 40 years. While futures were pointing lower overnight, an announcement from the Federal Reserve before the equity market open this morning sent stocks sharply higher, as markets welcomed additional stimulus from the Fed. In addition to its existing programs, the Fed announced further action aimed at supporting corporate and municipal debt markets, and will also take action to ensure that liquidity flows to small and medium-sized businesses as well. While the Fed’s corporate credit activities will largely focus on investment grade-rated issues, the Fed announced several initiatives that would allow it to purchase certain high yield issues and ETFs, and this sent high yield debt markets sharply higher in Thursday’s trading. The announcement from the Fed appeared to overshadow another negative weekly jobless claims print Thursday morning, with more than 6 million Americans filing initial jobless claims for a second week in a row.
Given the risks presented by the COVID-19 pandemic, uncertainty remains elevated. 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.
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 ~29% 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 2.5% 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 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.