Wealth Management — June 16, 2020
- US stocks traded higher on Tuesday as the S&P 500 rallied 1.9% to close at 3,125. With the rally, the index is now down 3.3% year to date and has corrected 7.7% from the February 19 all-time high.
- US equity futures pointed to a higher open this morning following a rally in international markets overnight, and gains accelerated following a better-than-expected May retail sales report released this morning. US retail sales rose 17% month over month, more than double the consensus expectation of 8.4%. Tuesday’s retail sales report provides another data point in support of a recovering economy as lockdowns have receded across much of the US in recent weeks. With Tuesday’s gains, the S&P 500 has now rallied for three straight sessions, partially recovering some of the losses from last Thursday’s near 6% retreat.
- All 11 S&P 500 sectors were higher, with Energy (+2.8%) and Health Care (+2.4%) outperforming the broader market, while Communication Services (+1.2%) and Utilities (+0.5%) lagged.
- Rates were higher across the curve, with the 10-year rising to 0.75% as of the 4 p.m. equity close. The yield curve steepened, as 10-year rates rose more than 2-year rates. WTI oil was higher at just over $38 per barrel, while gold was virtually flat. The US dollar was modestly higher, as measured by the US Dollar Index.
US stocks rallied on Tuesday as the S&P 500 gained 1.9%. With Tuesday’s rally, the index has now rallied for three straight sessions, partially recovering some of last Thursday’s near 6% retreat. With this week’s rally, the S&P 500 has held above 3,000 and has reclaimed its 200-day moving average, a technical indicator watched by many market participants. While concerns remain over COVID-19 as new case growth has accelerated in several US states and a new potential outbreak in China has also garnered attention, this week it would appear better-than-expected economic data has outweighed these concerns, as the S&P 500 shakes off last week’s weakness. Tuesday’s May retail sales report came in well ahead of expectations, with retail sales rising 17% month over month, more than double the consensus estimate for growth. The strong retail sales report points to a resilient US consumer, setting up a strong foundation for a potential consumer-led economic recovery in the coming months. Rates were higher across the curve on the back of the strong retail sales print, with 10-year rates moving to 0.75% in Tuesday’s trading. Equity-market leadership was more mixed than it has been in recent weeks, though small-caps did outperform large-caps on the session while defensive sectors generally lagged.
With Tuesday’s rally, the S&P 500 is just 7.7% 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 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, 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 and stronger-than-expected jump in retail sales.
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.