Wealth Management — June 25, 2020
- US stocks traded higher on Thursday as the S&P 500 rose 1.1% to close at 3,084. With the rally, the index is now down 4.6% year to date and has corrected 8.9% from the February 19 all-time high.
- US equities pared some of the prior day’s losses, though the S&P 500 is still poised to finish the week lower heading into Friday’s trading, down 0.5% on the week to date. While yesterday’s sell-off seemed driven, in part, by trade tensions and concerns around COVID-19 spread in the US, Thursday’s reversal higher may have been driven by better-than-expected economic data releases in the US. The May Durable Goods report came in better than expected, while initial jobless claims showed 12 consecutive weeks of decline. Continuing claims also declined last week, falling below 20 million for the first time since April. Financial stocks were notably strong in Thursday’s session ahead of the first round of Fed stress test results due out after the close.
- Ten of the 11 S&P 500 sectors were higher, with Financials (+2.7%) and Energy (+1.9%) outperforming the broader market, while Consumer Discretionary (+0.3%) and Utilities (-1.2%) lagged.
- Rates were mixed across the curve, with the 10-year rising to 0.68% as of the 4 p.m. equity close. The yield curve steepened, as 10-year rates rose while 2-year rates fell. WTI oil was higher on the session, closing at $39 per barrel, while gold was virtually flat. The US dollar was modestly higher, as measured by the US Dollar Index.
US stocks traded higher on Thursday as the S&P 500 gained 1.1%. After the index’s 2.6% decline on Wednesday—the largest single-day decline in two weeks—stocks staged a partial rebound led by small caps and cyclical sectors, which had lagged on Wednesday. While trade tensions and rising COVID-19 case counts had weighed on markets earlier this week, better-than-expected economic data on Thursday appeared to be enough for markets to stabilize. The May Durable Goods report came in well ahead of expectations, with durable goods orders rising 15.8% last month, ahead of consensus estimates calling for 10.5% growth. The weekly jobless claims report also had some encouraging signs for labor markets, with initial claims falling for a 12th consecutive week, and continuing claims falling below 20 million for the first time in two months. Bank stocks were also notable outperformers on Thursday, following news during the session that US bank regulators had approved changes to the Volcker Rule that would ease certain regulations for banks. Bank stocks will remain in focus in the coming days as the first round of the Fed’s annual stress test results are released after the close on Thursday.
With Thursday’s rally, the S&P 500 is just 8.9% 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 earlier this year. 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 and durable goods orders.
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.