Wealth Management — May 27, 2020
What Happened in the Markets?
- US stocks traded higher Wednesday, as the S&P 500 rallied 1.5% to close at 3,036. With the rally, the index is now down 6.0% year to date and has corrected 10.3% from the February 19 all-time high.
- US equities rallied for a third straight session as the S&P 500 closed above 3,000 for the first time in more than two months. As has been the case recently, cyclicals led the charge higher, with Financials, Industrials and small caps sharply outperforming again on Wednesday. While it was risk-on across equity markets, U.S. Treasuries did rally with 10-year rates moving lower during the session.
- All 11 S&P 500 sectors were higher Wednesday, with Financials (+4.3%) and Industrials (+3.3%) outperforming the broader market, while Communication Services (+0.6%) and Information Technology (+0.5%) lagged.
- Rates were mixed across the curve with the 10-year falling to 0.68% as of the 4 p.m. equity close. The yield curve flattened, as 10-year rates fell while 2-year rates rose slightly. WTI oil declined back below $33 per barrel, while gold rose 0.2%. The US dollar was modestly higher, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks rallied for a third straight session on Wednesday as the S&P 500 gained 1.5%. Wednesday’s rally brings the S&P 500 to its highest level in 11 weeks, with the index closing above 3,000 for the first time since March 5. As was the case the day prior, there appeared few obvious headlines to point to for the day’s rally, though it would seem 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. To that end, markets have rallied in recent weeks on hopes of a normalization in the comings months, as lockdowns recede and prospects of an effective COVID-19 treatment or vaccine appear to be rising. Wednesday’s rally, like Tuesday’s, was led by cyclical sectors with Financials rallying more than 4% on the session, while small caps rallied more than 3%, as measured by the Russell 2000 Index. Notably absent in Wednesday’s rally were some of the recent leaders in the Technology sector; the S&P 500 Technology sector was the worst-performing sector on the day. While it was risk-on across equity markets, rates and commodity markets told a different story: Crude oil prices fell 4%, 10-year Treasuries rallied throughout the session with 10-year rates back below 0.70%, and gold rallied modestly on the day.
With this week’s rally, the S&P 500 is now just 10.3% 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.