Wealth Management — June 8, 2020
What Happened in the Markets?
- US stocks traded higher Monday, as the S&P 500 rallied 1.2% to close at 3,232. With the rally, the index is now slightly positive year to date and down just 4.5% from the February 19 all-time high.
- Equities built off of last week’s momentum as a Monday afternoon rally sent the S&P 500 back into positive territory for the year. There were few market-moving headlines over the weekend, so perhaps Monday’s rally was simply a continuation of Friday’s enthusiasm following the strong May jobs report. It was mixed sector action today, with Energy stocks leading, and Utilities, Real Estate, and Industrials not too far behind. Small cap stocks outperformed again, with the Russell 2000 rising nearly 2%.
- All 11 S&P 500 sectors were higher Monday, with Energy (+4.3%) and Utilities (+2.6%) outperforming the broader market, while Information Technology (+0.5%) and Materials (+0.1%) lagged.
- Rates were mixed across the curve with the 10-year falling to 0.87% as of the 4 p.m. equity close. The yield curve flattened, as 10-year rates moved lower while 2-year rates moved higher. WTI oil fell to just over $38 per barrel, while gold rose 0.8%. The US dollar was modestly lower, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks rallied on Monday as the S&P 500 gained 1.2%, bringing the index back into positive territory for the year to date. Stocks begin the week where they left off last, with a sharp rally as equity markets continue to cheer Friday’s surprisingly strong May jobs report, while sentiment around reopening continues to improve with New York City beginning its reopening process today. Friday’s Non-Farm payrolls report showed the unemployment rate shockingly dropping last month to 13.3%, well ahead of the 19% consensus estimate; additionally, it showed the US economy added 2.5 million in payrolls, whereas the consensus estimate was a loss of 7.5 million. While Friday’s May jobs report is encouraging, and would suggest the worst is over as it pertains to the labor market following a historic pace of job losses earlier this spring, the 21 million Americans who are still classified as unemployed, per the report, show there is still a long way to go in this labor market recovery. Additionally, the May jobs report is just one data point in a sea of economic indicators that could show us how the economic recovery is progressing—of which we continue to monitor for more signs of a pickup in activity. Market action under the surface was mixed today, with the Tech and Materials sectors lagging while Energy and Utilities led; the 10-year yield fell back below 0.90% while gold rallied 0.8% to nearly $1,700 per ounce.
With today’s move, the S&P 500 is now just 4.7% 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 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.
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 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.