Wealth Management — May 13, 2020
What Happened in the Markets?
- US stocks traded lower on Wednesday as the S&P 500 fell 1.7% to close at 2,820. With the sell-off, the index is now down 12.7% year to date and has corrected 16.7% from the February 19 all-time high.
- US stocks declined for the second straight day, as investors weigh the implications of the global economy’s gradual re-opening. Yesterday, the nation’s top infectious disease officials warned that re-opening states too quickly could derail the chances of a faster economic recovery. In a speech today, the chairman of the Federal Reserve also gave some cautionary remarks, stating additional government stimulus could be needed to help support the economy’s recovery, and the outlook looks “highly uncertain and subject to significant downside risks.” While neither of these comments was likely the specific cause of this week’s slide, perhaps some consolidation was due in the wake of a 30%+ rally in the S&P 500 off of the late-March lows.
- All 11 S&P 500 sectors were lower Wednesday, with Utilities (-0.9%) and Consumer Staples (-0.9%) outperforming the broader market, while Financials (-3.0%) and Energy (-4.4%) lagged.
- Rates were lower across the curve besides the 2-year Treasury yield, which was unchanged, while the 10-year fell to 0.65% as of the 4 p.m. equity close. The yield curve flattened, as 10-year rates fell while 2-year rates were unchanged. WTI oil fell slightly to nearly $25 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 declined on Wednesday as the S&P 500 shed 1.7%. With the sell-off, the S&P 500 has fallen 3.8% in the past two sessions, the largest two-day drawdown since April 21. After markets were resilient last week amid continued poor economic data, the past two days have seen a turn in the opposite direction, on less-than-obvious news, perhaps signifying that recent gains need to be consolidated after a strong rally from March 23 lows. The S&P 500 had gained more than 30% off of the March lows heading into the week, while the NASDAQ composite had actually moved into positive territory for 2020. While optimism has grown in recent weeks around a “re-opening” of America and much of the global economy, uncertainty remains high; even as more states move toward re-opening, it will likely be many months before business activity begins to truly normalize. Perhaps sentiment around a potential re-opening moved too far too fast, and this week has seen a modest resetting of expectations. Comments Wednesday morning from Fed Chair Powell may also have contributed to some of the turn in sentiment, with the Fed chairman reiterating his view that the economic risks posed by the current health crisis remain extraordinary, though the Fed remains committed to supporting the economy through this time.
With Wednesday’s sell-off, the S&P 500 is now 16.7% below the February 19 all-time high, with the index sitting roughly halfway between the February 19 all-time high and the March 23 bear market low. 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. 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.