Wealth Management — May 18, 2020
What Happened in the Markets?
- US stocks surged higher on Monday, as the S&P 500 rallied 3.2% to close at 2,954. With the rally, the index is now down 8.6% year to date and has corrected 12.8% from the February 19 all-time high.
- Optimism reigned on Wall Street to start the week, with Monday’s rally taking the S&P 500 to its highest level in 11 weeks. Sentiment appeared to get a boost primarily from two developments over the weekend: 1) positive early results from an experimental vaccine currently under development by a US biotechnology company; and 2) comments that aired on television over the weekend from Fed Chair Jerome Powell that suggested the Fed still has more room to act, should it be needed, in response to the current risks posed to the economy by the COVID-19 pandemic and associated disruptions.
- All 11 S&P 500 sectors were higher Monday, with Energy (+7.6%) and Industrials (+6.6%) outperforming the broader market, while Consumer Staples (+1.7%) and Health Care (+0.9%) lagged.
- Rates were higher across the curve, with the yield on the 10-year rising to 0.72% as of the 4 p.m. equity close. The yield curve steepened, as 10-year rates rose more than 2-year rates. WTI oil surged 10% to over $32 per barrel, its highest level since early March, while gold fell 0.7%. The US dollar was modestly lower, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks surged to start the week as the S&P 500 rallied 3.2% to close at 2,954, its highest level since early March. Sentiment appeared to get a boost from two positive developments over the weekend. First, this morning a US biotechnology company announced positive initial results from an experimental COVID-19 vaccine currently under development. Similar announcements have been made in recent days from other companies/countries with updates on potential vaccines, and collectively it would appear hopes are rising that a vaccine may be within reach later this year or early next, though to be clear, all of the announcements to date have been preliminary and it is still too early to draw any conclusions with regard to how effective or realistic any of the current experimental vaccines or treatments may be. The second piece of news that garnered market attention Monday came from the Federal Reserve, and specifically comments made by Fed Chair Powell in the media over the weekend that suggested the Fed still had room to act, should it be needed, in terms of addressing the current economic challenges posed by the health crisis. The Fed Chair’s comments reinforce the message that the Fed will continue to provide liquidity to markets, while recent momentum in Washington D.C. for another round of fiscal stimulus also likely has played a part in the recent stock rally.
With Monday’s rally, the S&P 500 is now 12.8% below the February 19 all-time high, with the index having recovered more than half of the losses from the February 19 all-time high to the March 23 bear-market low. 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 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.