Wealth Management — May 20, 2020
What Happened in the Markets?
- US stocks rallied Wednesday, as the S&P 500 rose 1.7% to close at 2,972. With the rally, the index is now down 8.0% year to date and has corrected 12.2% from the February 19 all-time high.
- Wednesday’s rally saw the S&P 500 recover all of Tuesday’s losses, and leaves the index +3.8% on the week. Sentiment continues to see a lift as more of the US and global economy moves toward re-opening following pandemic-related lockdowns. As was the case on Monday, cyclical sectors and small caps outperformed on the session. Wednesday also marked a historic day for Treasury markets, with the US Treasury issuing 20-year bonds for the first time in more than three decades; while there was some fanfare around the auction, yields across the curve ended the session little changed from Tuesday.
- All 11 S&P 500 sectors were higher Wednesday, with Energy (+3.8%) and Communication Services (+2.7%) outperforming the broader market, while Utilities (+0.5%) and Health Care (+0.1%) lagged.
- Rates were little changed across the curve, with the yield on the 10-year closing at 0.69% as of the 4 p.m. equity close. WTI oil continued its move higher, up to nearly $34 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 rose sharply on Wednesday as the S&P 500 climbed 1.7%. After selling off late in the session Tuesday, equities recovered on Wednesday, with the S&P 500 now trading at its highest level in 11 weeks. The back and forth in markets has continued in recent weeks, as markets debate what the shape of a potential economic recovery could look like once lockdowns recede, and how various vaccines and treatments currently under development could impact that potential recovery. While uncertainty remains high, both as it relates to the health crisis as well as to the economic impacts, market sentiment around a potential recovery appears to be improving as much of the US and global economy have moved toward re-opening. With Wednesday’s rally, the S&P 500 is now up 3.8% on the week; cyclical sectors have led this week, with Energy, Industrials, Materials and Financials rising at least 5%. Oil prices have also shown strong returns, with WTI up to over $33 per barrel, the highest level since early March.
With this week’s rally, the S&P 500 is now 12.2% 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.