Wealth Management — June 3, 2020
What Happened in the Markets?
- US stocks traded higher Wednesday, as the S&P 500 rallied 1.4% to close at 3,123. With the rally, the index is now down 3.3% year to date, and has corrected 7.8% from the February 19 all-time high.
- US equities rallied for a fourth straight session as the S&P 500 crossed 3,100 to trade to nearly three-month highs. As has been the case in recent weeks, cyclicals led the move higher, with Financials, Industrials and small caps sharply outperforming again on Wednesday. The rally was perhaps in part catalyzed by better-than-expected jobs data in the US Wednesday morning, with the ADP employment report showing private payrolls contracted by 2.7 million last month, well below the consensus estimate of 9 million, and a significant improvement from April’s near 20 million lost jobs. The ADP data comes ahead of Friday’s May Non-Farm payrolls report from the Bureau of Labor Statistics.
- Ten of the 11 S&P 500 sectors were higher Wednesday, with Industrials (+3.9%) and Financials (+3.8%) outperforming the broader market, while Consumer Staples (+0.2%) and Health Care (-0.2%) lagged.
- Rates were higher across the curve with the 10-year rising to 0.76% as of the 4 p.m. equity close. The yield curve steepened, as 10-year rates rose more than 2-year rates. WTI oil rose to nearly $37 per barrel, while gold fell 1.7%. The US dollar was modestly lower, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks rallied for a fourth straight session on Wednesday as the S&P 500 gained 1.4%. Wednesday’s rally brings the S&P 500 to its highest level in nearly three months, with the index now down only 3.3% year to date. As much of the US and globe have begun easing lockdown restrictions in recent weeks, equity markets have reacted positively, as investors look forward to a potential resumption of economic activity and the “re-opening” of the economy. Market leadership has also shifted recently toward more cyclical and economically sensitive sectors such as Financials, Industrials, and Materials, as well as smaller capitalization stocks. Wednesday was more of a continuation of that trend, with Financials and Industrials gaining nearly 4%, and small caps rising almost 3%. Ten-year US Treasury yields rose to 0.76%, the highest level since mid-April, and gold fell 1.7%, emphasizing the risk-on tone as “safe-haven” assets lagged. The decline in the US dollar, which has fallen almost 3% in just over a week, has also contributed to increased appetite for equities both domestically and even more so abroad. Although there is plenty of good news currently when it comes to financial market performance, several risks remain front and center—including potential for a resurgence in the health crisis, heightened US and China tensions, and growing social unrest in the US—which could drive volatility going forward.
With this week’s rally, the S&P 500 is now just 8.4% away from reaching 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 have become more tangible in recent weeks, as unemployment has spiked and consumer and corporate activity have fallen 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.
The Global Investment Committee’s Outlook
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 re-opening of the economy, has recently allowed the index to surge through 3000 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 re-opening, 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.