Wealth Management — May 1, 2020
What Happened in the Markets?
- US stocks traded lower on Friday as the S&P 500 fell 2.8% to close at 2,831. With the sell-off, the index is now down 12.4% year to date and has corrected 16.4% from the February 19 all-time high.
- In a week filled with central bank announcements, corporate earnings reports and economic data releases, US equities ended the week roughly where they began, as an early-week rally gave way to a late week sell-off, leaving the S&P 500 down just 6 points from last Friday’s close. While there was no obvious catalyst for Friday’s pullback, perhaps some consolidation of recent gains was warranted after the S&P 500 closed at a near two-month high on Wednesday, having rallied some 30% from the late March lows. Weakness in technology and internet related stocks also likely weighed on the market Friday as several recent leaders sold off following earnings results.
- All 11 S&P 500 sectors were lower Friday, with Consumer Staples (-1.2%) and Communication Services (-1.6%) outperforming the broader market, while Consumer Discretionary (-4.6%) and Energy (-6.0%) lagged.
- Rates were mixed across the curve, with the yield on the 10-year virtually unchanged at 0.63% as of the 4 p.m. equity close. The yield curve slightly flattened, as 10-year rates fell while 2-year rates rose. WTI oil rose to just under $20 per barrel, while gold rose 0.9%. The US dollar was modestly higher, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks fell on Friday as the S&P 500 lost 2.8%, ending a back-and-forth week on Wall Street that saw the index rally nearly 4% through Wednesday’s close, only to give it all back as a late week sell-off leaves the index roughly flat from last Friday’s close. While there was no obvious catalyst for the turn in sentiment, perhaps some consolidation was due following the sharp equity market rally seen in recent weeks. April marked the strongest month for the S&P 500 since 1987, and at this week’s highs, the S&P 500 had rallied some 30% off the March lows, while the technology sector and the Tech-heavy NASDAQ 100 Index actually moved into positive territory for 2020. While markets have taken a decidedly more positive turn in recent weeks as a slew of fiscal and monetary stimulus announcements, coupled with a slowing in the growth of new COVID-19 cases globally, has buoyed sentiment, uncertainty remains high and the economic damage caused by the “sudden stop” in economic activity in recent months is far from over. As a result, volatility is likely to remain high, and the back and forth in markets this week is likely to be repeated in the weeks ahead as markets debate what a “re-opening” of the economy and path toward a potential economic recovery looks like.
Even with Friday’s decline, the S&P 500 still sits just 16.4% below the February 19 all-time high, with the index having retraced more than half of the February into March sell-off. The index has 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
The dual shocks of coronavirus and the collapse in oil prices are likely to push the global economy into recession over the next 1-2 quarters, ending the 11-year business cycle. However, the swift and furious bear market sell-off since the S&P 500 all-time high on February 19 leaves most asset classes already fully discounting that outcome. Furthermore, we are anticipating an increasingly coordinated “do whatever it takes” stance from global policymakers who are likely to deliver both monetary and fiscal stimulus that should stabilize things as we navigate the human disruption and health-related parts of the crisis. On the other side of the recession, we see potential for a global recovery. Green shoots were already visible outside the US, and inside the US, the foundational health of the consumer has never been stronger to weather a recession, i.e., low unemployment, strong balance sheets and housing market with momentum. Consequently, in recent weeks the GIC has reduced exposures to long-duration Treasuries and began rebuilding exposure to US large-cap growth, US small/mid-cap stocks, US credit and commodities. While we believe the current equity market correction constitutes a cyclical bear market within a longer-term equity bull market, the GIC believes a new multi-year bear market in fixed income has begun. The next leg of the secular bull market in equities is unlikely to see the same leaders as the past decade—namely Technology and Consumer Discretionary stocks. Instead, the GIC sees Financials, Industrials and Health Care stocks likely to outperform. Volatility over the next few quarters should be exploited frequently to rebalance portfolios to strategic asset allocations.
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.