Wealth Management — July 14, 2020
What Happened in the Markets?
- US stocks traded higher on Tuesday as the S&P 500 rose 1.3% to close at 3,198. With the rally, the index is now down 1.0% year to date and has corrected 5.6% from the February 19 all-time high.
- After fading Monday afternoon, stocks recovered on Tuesday with the S&P 500 making another run at the June 8th local high of 3,232 as cyclical sectors led the market higher; Energy, Materials, and Industrials sectors all recorded 2%+ moves on the session. Notably absent from Tuesday’s cyclical leadership were Financials, which lagged on the day as markets digest a slew of bank earnings results this week. There was no obvious catalyst to point to for Tuesday’s rally, just as there was no clear catalyst for Monday afternoon’s slide, though we expect markets to remain volatile this week as second quarter earnings season kicks off.
- All 11 S&P 500 sectors were higher, with Energy (+3.6%) and Materials (+2.5%) leading the broader market, while Financials (+0.7%) and Consumer Discretionary (+0.6%) lagged.
- Rates were higher across the curve, with the 10-year Treasury rate rising to 0.63% as of the 4 pm equity market close. Gold prices rose 0.4% and WTI oil rose back over $40 per barrel; the US dollar weakened modestly on the day, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks rallied on Tuesday, with the S&P 500 gaining 1.3% to close at 3,198. After alternating between rallies and declines last week, the first two days of this week have proven to be more of the same. While Monday saw a morning rally briefly take the S&P 500 into positive territory for the year-to-date, a sharp afternoon reversal saw the index end the day down almost 1% on the session, and more than 2% below the intra-day high. While yesterday afternoon’s slide had markets jittery this morning, with the S&P 500 trading down as much as -0.90% in the first hour of Tuesday’s trading, markets stabilized and early losses gave way to gains with the S&P 500 rallying back towards 3,200 by session’s end. Expect this back-and-forth in markets to continue in the coming weeks, with a number of potentially market-moving catalysts on the horizon, including second quarter earnings season, ongoing updates on the health crisis, and debate beginning in Washington D.C. over a potential second tranche of stimulus. Earnings season kicked-off in earnest this morning with several large-cap US banks reporting second quarter results. While capital markets activity was strong in the second quarter driving better-than-expected results at some banks, provisions for expected loan losses did grow more than forecast at the three large-cap banks that reported results Tuesday morning, stoking fears that loan losses may accelerate in the second half of the year. On the back of mixed results, bank stocks lagged the S&P 500 in Tuesday’s trading.
With today’s rally, the S&P 500 is now 5.6% 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.