The 1% Move Report

Wealth Management — July 6, 2020

• US stocks traded higher on Monday as the S&P 500 rose 1.6% to close at 3,180. With the rally, the index is now down 1.6% year to date and has corrected 6.1% from the February 19 all-time high.
• With Monday’s rally, the S&P 500 has now rallied for five consecutive sessions, the first such five-day streak for the index in 2020. Last week, stocks rallied as a string of positive economic data reports in the US offered reason for optimism, and Monday was no different, with a stronger-than-expected ISM Non-Manufacturing Index print helping send US equities higher. Global stocks were also poised for a good session Monday, following a strong rally in Chinese equities, with several broad China equity indices having rallied ~10% over the past week.
• Ten of the 11 S&P 500 sectors were higher, with Consumer Discretionary (+3.2%) and Communication Services (+2.1%) leading on the day, while Utilities (-1.3%) finished in the red.
• Rates were slightly higher across the curve, with 10-year rates rising to 0.68% as of the 4 pm equity market close. Gold prices rallied 0.6% on the session, to $1,787 per ounce, while the US dollar weakened modestly on the day, as measured by the US Dollar Index. 

US stocks rallied on Monday as the S&P 500 rose 1.6% to close at 3,180. The S&P 500 has now rallied for five consecutive sessions, marking the longest positive streak for the index since December of last year. With the rally, the index is now up 5.7% over the past five sessions. As has been the case in recent sessions, better-than-expected economic data in the US helped send stocks higher on Monday. Last week saw equities surge on the back of strong housing data, consumer confidence, manufacturing sentiment and jobs data, and on Monday, markets rallied alongside a better-than-expected ISM non-manufacturing survey print, with the index unexpectedly rising to 57.1 (versus consensus estimate of 50.2) this month, reflecting improving sentiment out of service-oriented US companies. Collectively, recent economic data points to a recovering US economy, and offers hope that a consumer-led broader economic recovery could take hold in the second half of 2020. Global stocks also received a boost on Monday from strong performance out of China, with Chinese equities surging in recent sessions; the Shanghai Composite has rallied 8% over the past two trading days, with the index now trading at its highest level in two years.   

With the recent rally, the S&P 500 is now just 6.1% 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.

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.

Shanghai Stock Exchange Composite Index: A capitalization-weighted index. The index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The index was developed on December 19, 1990 with a base value of 100.

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.