Wealth Management — May 19, 2020
What Happened in the Markets?
- US stocks drifted lower Tuesday, as the S&P 500 fell 1.1% to close at 2,923. With the sell-off, the index is now down 9.5% year to date and has corrected 13.7% from the February 19 all-time high.
- While 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, some of those gains were given back on Tuesday with a late-afternoon sell-off sending the index modestly lower for the session. While sentiment received a boost over the weekend from optimism around a potential vaccine as well as stimulus hopes following comments from Fed Chair Jerome Powell over the weekend, skepticism prevailed on Tuesday as markets continue to navigate a tremendously uncertain environment, both as it relates to the current health crisis as well as the global economy.
- All 11 S&P 500 sectors were lower Tuesday, with Consumer Discretionary (-0.1%) and Information Technology (-0.4%) outperforming the broader market, while Financials (-2.5%) and Energy (-2.9%) lagged.
- Rates were lower across the curve, with the yield on the 10-year falling to 0.69% as of the 4 p.m. equity close. The yield curve flattened, as 10-year rates fell more than 2-year rates. WTI oil moved to over $32 per barrel, while gold rose 0.8%. The US dollar was modestly lower, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks fell modestly on Tuesday as the S&P 500 declined 1.1%. After rallying over 3% to start the week on increased optimism on preliminary experimental vaccine data and a continued accommodative Federal Reserve, equities pared some of Monday’s gains today as the outlook continues to remain uncertain. Yesterday, a US biotechnology company announced positive initial results from an experimental COVID-19 vaccine currently under development, and similar announcements have been made in recent days from other companies/countries with updates on potential vaccines. Collectively, it would appear hopes are rising that a vaccine may be within reach later this year or early next; however, 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. That skepticism may have crept back into markets Tuesday afternoon, as equities gave back some of Monday’s gains, mainly in sectors that surged on Monday like Energy stocks, which lost nearly 3% on the session. Even with Tuesday’s late-session slide, the S&P 500 is still up more than 2% on the week, and Tuesday’s modest decline was likely a market that needed to digest the prior day’s surge.
With this week’s rally, the S&P 500 is now 13.7% 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..