The 1% Move Report

Timely commentary on market performance whenever the S&P 500 changes more than 1% in a day.






Wealth Management — May 12, 2020

What Happened in the Markets?

  • US stocks traded lower on Tuesday as the S&P 500 fell 2.0% to close at 2,870. With the sell-off, the index is now down 11.2% year to date and has corrected 15.2% from the February 19 all-time high.
  • US stocks drifted sharply lower as the afternoon wore on Tuesday, absent any clear negative developing news headlines. Although there was no clear catalyst for the day’s slide, CPI data reported this morning showed a fall of 0.4% month over month on core CPI, the largest decline on record. The nation’s top infectious disease officials also warned that re-opening states too quickly could derail the chances of a faster economic recovery, perhaps weighing on sentiment. Given the strong recent rally in stocks, however, perhaps some consolidation of recent gains was due.   
  • All 11 S&P 500 sectors were lower Tuesday, with Consumer Staples (-0.9%) and Utilities (-0.9%) outperforming the broader market, while Industrials (-2.8%) and Real Estate (-4.3%) lagged.
  • Rates were lower across the curve, with the yield on the 10-year falling to 0.67% as of the 4 p.m. equity close. The yield curve flattened, as 10-year rates fell more than 2-year rates. WTI oil rose to nearly $26 per barrel, while gold rose 0.3%. The US dollar was modestly lower, as measured by the US Dollar Index. 

Catalysts for Market Move

US stocks declined on Tuesday as the S&P 500 shed 2.0%. With the sell-off, the S&P 500 is down 11.2% on the year, while the NASDAQ Composite stays positive for 2020. The 2% sell-off Tuesday comes after a resilient week last week as markets rallied despite continued poor economic data. While last week markets chose to look past weak economic data and instead toward re-opening, perhaps Tuesday’s sell-off indicates that sentiment moved too far too fast, and that some consolidation of recent gains is warranted. While there were no obvious catalysts for Tuesday’s move lower, cyclical stocks and real estate were particularly weak, and rates moved lower across the curve. Washington was in focus again Tuesday, as House Democrats unveiled a new round of proposed stimulus; however, at this point it would appear there is little chance the proposed bill would make it through the Senate in its current form. While markets have traded largely better in recent weeks, particularly compared to the February and March sell-off, Tuesday’s weakness serves as a reminder of the challenges faced by the economy and health crisis today, and volatility is likely to remain elevated in the near term.

Even with Tuesday’s sell-off, the S&P 500 is now 15.2% 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.

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