Wealth Management — June 12, 2020
- US stocks traded higher on Friday as the S&P 500 rose 1.3% to close at 3,041. With the rally, the index is now down 5.9% year to date and has corrected 10.2% from the February 19 all-time high.
- After Thursday’s near 6% slide, the S&P 500 finished the week on a more positive note, with the index snapping a three-day losing streak with Friday’s rally. However, the S&P 500 still experienced a 4.8% weekly drop, the biggest weekly loss since late March. After a surge off of the March lows that saw the S&P 500 rally more than 40% in recent weeks as the index briefly traded back into positive territory for 2020, perhaps some consolidation of recent gains was due and this week’s pause may reflect that. There were no obvious catalysts to point to for Friday’s relief rally.
- Nine of the 11 S&P 500 sectors were higher Friday, with Real Estate (+3.2%) and Financials (+3.0%) outperforming the broader market, while Consumer Staples (-0.2%) and Utilities (-0.2%) lagged.
- Rates were mixed across the curve, with the 10-year rising to 0.71% as of the 4 p.m. equity close. The yield curve steepened, as 10-year rates moved higher while 2-year rates moved lower. WTI oil was little changed at just over $36 per barrel, while gold rose 0.2%. The US dollar was modestly higher, as measured by the US Dollar Index.
US stocks rose on Friday as the S&P 500 rallied 1.3%. With Friday’s rally, the S&P 500 ends the week holding the 3,000 level, and closed back above its 200-day moving average, a technical measure watched by many traders. Even with Friday’s relief rally, the S&P 500 finishes the week down 4.8%. After a surge off of the March lows that saw the S&P 500 rally more than 40% in recent weeks as the index briefly traded back into positive territory for the year, and the NASDAQ composite traded to a new all-time high, perhaps some consolidation was due, and this week’s pause likely reflects that. A downbeat economic outlook from the Federal Reserve may have been the catalyst for this week’s decline, with the Fed providing a reminder that the economic outlook remains highly uncertain, and the challenges facing the US and global economy are prevalent. Aside from the Fed, troubling data this week across the US pointing to a rise in new COVID-19 case growth in several states that have recently relaxed lockdown conditions serve as a reminder that the health crisis is still far from over, also likely weighing on sentiment. On a more positive note, however, economic data this week continues to offer reasons for optimism, with initial jobless claims falling for a 10th consecutive week.
With Friday’s rally, the S&P 500 is just 10.2% below its previous all-time high of 3,386 on February 19. The index experienced both a 20%+ bear-market decline and a 20%+ bull-market rally in the span of just eight weeks. This volatility perhaps is unsurprising, as the range of potential outcomes for the economy looking forward is wide, given near-unprecedented headwinds posed by the COVID-19 pandemic alongside near-unprecedented levels of stimulus coming from governments and central banks. The global economy has likely slid into recession, and the negative economic effects of the pandemic became more tangible this spring, as unemployment rates spiked and consumer and corporate activity fell 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. 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. Early signs of that potential recovery appear to be at hand, with green shoots in recent economic data, including last month’s surprising growth in payrolls.
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.