The 1% Move Report

Wealth Management — June 29, 2020

• US stocks traded higher on Monday as the S&P 500 rose 1.5% to close at 3,053. With the rally, the index is now down 5.5% year to date and has corrected 9.8% from the February 19 all-time high.
• Stocks rallied to begin the holiday-shortened week (US markets are closed on Friday in observance of July 4^th). While last week stocks sold off on virus spread concerns, better-than-expected US economic data may have helped turn the tide on Monday. This morning’s pending home sales report showed a record 44% month-over-month rise in pending home sales in May, more than double the consensus estimate. Last month’s strong rise in pending home sales is yet another recent data point that supports the “V-shaped” recovery narrative that has helped power the recent recovery in financial markets.
• All 11 S&P 500 sectors were higher, with Industrials (+3.2%) and Communication Services (+2.0%) outperforming the broader market, while Financials (+1.0%) and Health Care (+0.9%) lagged.
• Rates were little changed across the curve from Friday's close, with the 10-year rate settling near 0.64% as of the 4 pm equity market close. WTI oil moved higher, back above $39 per barrel, while gold was flat at $1,770 per ounce. The US dollar was modestly higher, as measured by the US Dollar Index. 

US stocks rallied on Monday as the S&P 500 rose 1.5%. Last week the S&P 500 slid nearly 3% as a resurgence in new COVID-19 case growth in the US raised concerns around the state of the current health crisis and what it could mean for the economic re-opening underway across much of the United States. While the health crisis very much remains a question mark, stronger-than-expected economic data on Monday appeared to ease market jitters, returning focus to what appears to be a “V-shaped” recovery underway as economic activity resumes following widespread lockdowns earlier this spring. Monday morning saw the release of the May pending home sales report, which showed pending home sales surged a record 44% last month, more than double the consensus expectation. The report points to a strong recovery in the housing market, and is another positive sign as it pertains to the strength of the US consumer. Economic data will be in focus this week, with the release of the Manufacturing PMIs on Wednesday (7/1), and the June jobs report on Thursday (7/2).  

With today’s rally, the S&P 500 is now 9.8% 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, durable goods orders and pending home 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.