The 1% Move Report

Wealth Management —May 26, 2020

•  US stocks traded higher Tuesday, as the S&P 500 rose 1.2% to close at 2,992. With the rally, the index is now down 7.4% year to date and has corrected 11.7% from the February 19 all-time high.
• US equities began the holiday-shortened week on a strong note, as the S&P 500 built on last week’s rally to climb to its highest level since early March. 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 last week, cyclical sectors and small caps outperformed sharply on the session. While a strong day overall, stocks did close well off their highs for the day, with a late-afternoon slide materializing as headlines crossed suggesting the US was considering imposing sanctions on Chinese officials and firms.
• Nine of the 11 S&P 500 sectors were higher Tuesday, with Financials (+5.0%) and Industrials (+4.2%) outperforming the broader market, while Information Technology (-0.1%) and Health Care (-0.2%) lagged.
• Rates were higher across the curve with the 10-year rising to 0.69% as of the 4 p.m. equity close. The yield curve steepened, as 10-year rates rose more than 2-year rates. WTI oil rose to $34 per barrel, while gold declined 1.2%. The US dollar was modestly lower, as measured by the US Dollar Index. 

US stocks rose sharply on Tuesday as the S&P 500 climbed 1.2%. Tuesday’s rally brings the S&P 500 to its highest level in 11 weeks with the index briefly crossing above 3,000 for the first time since early March during the session, though a late-day slide did see the index close back below that level. US equity markets opened sharply higher this morning, as optimism continues to creep into markets as pandemic-related lockdowns are being lifted across much of the US and globe. As the economy “re-opens,” markets appear to be looking toward a potential recovery in economic activity following a dismal few months in which much of the global economy faced a “sudden stop” as a result of the health crisis. Markets have rallied in recent weeks on hopes of a normalization in the coming months, as lockdowns recede and prospects of an effective COVID-19 treatment or vaccine appear to be rising. Tuesday’s rally, like last week’s, was led by cyclical sectors, with Financials, Industrials and Energy among the day’s leaders. Small caps were also notable outperformers on the day, with the Russell 2000 rallying nearly 3% on the session. While perhaps not the catalyst for Tuesday’s rally, there were green shoots to be found in the day’s economic releases, with a much stronger-than-expected April New Home Sales report in the US this morning that showed 623,000 new homes were sold last month, a slight increase from the prior month’s tally, and significantly better than the 480,000 consensus expectation.

With this week’s rally, the S&P 500 is now 11.7% 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 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.