Wealth Management — July 10, 2020
What Happened in the Markets?
- US stocks traded higher on Friday as the S&P 500 rose 1.1% to close at 3,185. With the rally, the index is now down 1.4% year to date and has corrected 5.9% from the February 19 all-time high.
- After a string of rallies last week, this week has seen the S&P 500 alternate between positive and negative sessions, though through the back and forth the index still ended the week 1.8% higher. There were few obvious catalysts to point to for Friday’s rally, though reports this morning showing positive early results for a potential COVID-19 treatment may have helped boost sentiment. While this week was largely quiet with regard to data releases, next week fundamentals will certainly be back in focus, as second quarter earnings season kicks off with a slew of US companies scheduled to report results.
- Nine of the 11 S&P 500 sectors were higher, with Financials (+3.5%) and Energy (+3.3%) leading the broader market, while Information Technology (-0.03%) and Health Care (-0.2%) were the only sectors negative.
- Rates were higher across the curve, with 10-year rates rising to 0.63% as of the 4 pm equity market close. Gold prices fell 0.2% on the session to $1,799 per ounce; the US dollar weakened modestly on the day, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks rallied on Friday, with the S&P 500 gaining 1.1% to close at 3,185. After rallying in each session of trading last week, this week has seen the S&P 500 bounce within a range as the index alternated between declines (Tuesday and Thursday) and rallies (Monday, Wednesday and Friday). Through the see-saw action, however, the index still ends the week in the green, up 1.8%, and the NASDAQ Composite ends the week at yet another all-time high. While last week’s powerful rally appeared driven by a string of strong economic data releases in the US, this week’s quiet economic calendar perhaps contributed to choppier trading, as markets consolidate ahead of second quarter earnings season, which begins next week. While second quarter results are likely to show a sharp contraction in profits, as a result of the recession that took hold following lockdowns across much of the US this spring, markets are likely to be more focused on company guidance looking forward, and to what extent activity is expected to pick up in the second half of 2020. Next week’s earnings calendar is dominated by financials, with several large-cap banks scheduled to report results.
With today’s rally, the S&P 500 is now 5.9% below its previous all-time high of 3,386 on February 19. After falling 20% in the first quarter of 2020—the worst quarter for the index since 4Q 2008—the S&P 500 has now finished the second quarter having rallied back 20%—the strongest quarter for the index since 4Q 1998. While markets corrected sharply this spring as the COVID-19 pandemic drove the US and global economies into recession, stocks have bounced back almost as rapidly, as markets look to what could be an economic recovery in the second half of 2020. While the health crisis has wreaked havoc on the economy and driven a near-unprecedented spike in unemployment, policy makers have reacted, 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. US policy makers have acted aggressively to address the challenges posed to the economy, and ultimately this policy response should help drive an economic recovery once the current health crisis is resolved. Early signs of that potential recovery appear to be at hand, with green shoots apparent in the recent economic data.
The Global Investment Committee’s Outlook
Over the past 90 days, the S&P 500 has traversed two-and-a-half distinct market phases. The first phase fully discounted the sudden-stop COVID-19 lockdown recession from February 19-March 23 in a -34% bear market drawdown. Second, was the repair phase, which was dominated by “do whatever it takes” and outsized policy moves by both the Federal Reserve and Congress where stimulus totaled almost 47% of GDP and was accompanied by a nearly 60% retracement of the sell-off from March 24-April 30. And, finally the current early innings of the recovery phase, which has been characterized by the faster-than-expected reopening of the economy, has recently allowed the index to surge through 3,000 and its 200-, 100- and 50-day moving averages. Although the GIC has been looking for a V-shaped recovery and a decisive shift in market leadership that has accompanied recessions in the past, and we have been well positioned for recent rotations toward small caps, value style, international stocks and cyclicals like financials, we acknowledge that the market has moved very far, very fast. With some of the easy money having been made off the trough, we think markets remain range-bound for the next 3-6 months as the twists and turns of this particular recession with its dependency on the virus trajectory and the true pace of full economic reopening likely to be opaque and lumpy. In this environment, we are very focused on active security selection with an eye toward valuations and risk premiums in both US stocks and corporate credit. The richness, crowdedness and concentration of the S&P 500 Index, along with our belief that US Treasuries are unattractive and that the US dollar is ultimately poised to weaken, has us also pursuing high levels of asset class diversification with above-average exposures to SMID stocks, international equities and commodities.
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.