Wealth Management — May 7, 2020
What Happened in the Markets?
- US stocks traded higher on Thursday as the S&P 500 rose 1.2% to close at 2,881. With the rally, the index is now down 10.8% year to date and has corrected 14.9% from the February 19 all-time high.
- US stocks have rallied this week as markets appear to be looking past the current weakness in economic data and toward what could be a “re-opening” of the economy across much of the US and world in the coming weeks. Tech stocks were among the leaders Thursday, following strong results from several tech companies overnight; underscoring the strength in tech, the NASDAQ Composite Index has now moved into positive territory for 2020. Tomorrow, all eyes will be on the April non-farm payrolls report, which is expected to show a record spike in unemployment.
- Nine of the 11 S&P 500 sectors were higher Thursday, with Energy (+2.5%) and Financials (+2.2%) outperforming the broader market, while Health Care (-0.04%) and Consumer Staples (-0.4%) lagged.
- Rates were lower across the curve, with the yield on the 10-year falling to 0.63% as of the 4 p.m. equity close. The yield curve flattened, as 10-year rates fell more than 2-year rates rose. WTI oil fell 3.5% to just over $23 per barrel, while gold rose 1.9%. The US dollar was modestly lower, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks rallied on Thursday as the S&P 500 gained 1.2%. With the rally, the S&P 500 is down just 10.8% on the year, while the NASDAQ composite has moved into positive territory for 2020. Technology stocks were among Thursday’s leaders, as several tech companies reported strong results overnight. Energy stocks also outperformed on the session, driven by higher crude prices this morning, though energy stocks held gains even after oil prices reversed lower in the afternoon. While equities rallied sharply on the day, Treasury rates moved lower across the curve, with the 10-year rate settling back near the week’s lows at 0.63%, while the 2-year Treasury moved to 0.13%, marking a new all-time low. The rally in Treasuries comes ahead of Friday’s April jobs report, which is expected to show a record spike in unemployment last month. While tomorrow’s jobs report will likely underscore the extent of dislocation in the US economy today, equity markets appear to be looking past the current economic weakness and instead toward the potential re-opening of the economy in the coming weeks and months.
With Thursday’s rally, the S&P 500 is just 14.9% below the February 19 all-time high, with the index having retraced more than half of the February into March sell-off. The index has 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, i.e., low unemployment, strong balance sheets and housing market with momentum. 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.