Wealth Management — May 14, 2020
What Happened in the Markets?
- US stocks traded higher on Thursday as the S&P 500 rallied 1.1% to close at 2,853. With the rally, the index is now down 11.7% year to date and has corrected 15.8% from the February 19 all-time high.
- US stocks opened this morning sharply lower, but an intra-day reversal saw the index climb more than 3% from the morning’s lows to close near the highs for the session. There was no obvious catalyst for the day’s turn in direction, but a swing in leadership intra-day saw many of the cyclical sectors that had been laggards in recent sessions and Thursday morning, reverse sharply, leading the broad market higher. This reversal was most evident in Financials, which finished the day 2.6% higher, after having traded nearly 3% lower in the first half hour of Thursday’s session. Initial jobless claims reported for the prior week were 2.9 million, ahead of the 2.5 million consensus estimate, but perhaps optimistically have fallen for a sixth consecutive week.
- Ten of the 11 S&P 500 sectors were higher Thursday, with Financials (+2.6%) and Consumer Discretionary (+1.3%) outperforming the broader market, while Real Estate (+0.1%) and Consumer Staples (-0.3%) lagged.
- Rates were lower across the curve with the 10-year falling to 0.63% as of the 4 p.m. equity close. The yield curve flattened, as 10-year rates fell more than 2-year rates. WTI oil surged to over $27 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 rallied sharply after initial weakness Thursday morning, with the S&P 500 ending the day up 1.1% after having fallen as much as 1.9% intra-day during the morning’s trading. While there was no obvious catalyst to point to for the day’s swing, some of the more cyclical sectors that had underperformed earlier this week were among those that led the market higher in Thursday’s trading, perhaps signifying this week’s selling pressure in cyclicals has been exhausted. Financials displayed notable strength as the S&P 500 financials sector finished the day nearly 3% higher after having slid nearly 3% in early trading on Thursday. Even with Thursday’s reversal higher, the S&P 500 is still off 2.6% on the week to date, as markets appear to be consolidating the sharp rally off of the March bear-market lows. The S&P 500 had rallied more than 30% off of those March lows heading into this 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, with volatility returning to markets after a relatively quiet week of trading last week.
With Thursday’s rally, the S&P 500 is now 15.8% 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.