Morgan Stanley
  • Wealth Management
  • May 18, 2020

U.S. Markets Are Unlikely to Return to March Low

The S&P 500 seems range-bound between the February high and March low. Here’s why it may stay there for a while.

In the past three months, investors have experienced a remarkably steep stock market plunge and an impressive snapback, followed by approximately three weeks with the S&P 500 bouncing around a trading range of 2800 to 2950. I expect this phase to continue for the next three to six months.

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Excitement that social-distancing measures were helping to contain the spread of COVID-19 has given way to the reality of profound economic damage—record levels of unemployment, collapsing demand and poor consumer confidence readings. Stock valuation measures based on corporate fundamentals have become unreliable, as 40% of companies have stopped providing earnings guidance. 

I worried in April that U.S. stocks had moved too far, too fast and still think that there is a chance for as much as a 10% correction from here, as trade tensions and partisan politics resume. Nonetheless, I don’t subscribe to the bearish narrative that the S&P 500 will retest the March lows. Here are three key reasons why:

  • Massive amounts of direct government and monetary stimulus are in place. Congress has passed trillions in aid and may provide more. The Federal Reserve has also provided unprecedented levels of stimulus. Fed Chair Jerome Powell recently quashed concerns about the Fed taking interest rates into negative territory, allowing the yield curve, an important economic indicator based on interest rates, to steepen (a good thing, as it signals bond market expectations of future economic growth).  
  • Consumers should prove resilient. Even though confidence measures have plunged, they aren’t as low as prior recessions. Surveys show that up to 80% of unemployed workers consider themselves temporarily furloughed. If they are correct, long-term unemployment may not be the intractable problem it now seems. Consumer confidence, spending and employment are closely linked. The underlying strength of the U.S. consumer is one reason why I forecast a U-shaped economic recovery.
  • Market technicals, sentiment and positioning argue against sharper declines. Investors, both individual and institutional, remain conservatively invested, with cash on the sidelines that would likely be put to work in a sell-off, potentially creating a floor under stock prices. Sentiment, as measured by the American Association of Individual Investors, is decidedly downbeat, with 53% saying that they are bearish, the highest level since 2013. That’s a contrarian indicator and signals possible gains ahead, if sentiment improves.

While I expect major U.S. market indices to remain in the current range, I see opportunities for active investors to exploit volatility by looking outside the U.S., in small-capitalization stocks and in corporate credit markets. Consider taking profits in prior U.S. winners that could be vulnerable. Investors who remain passively in U.S. indices may experience frustration with the trading range that is underway and likely to continue.

This article is based on Lisa Shalett’s GIC Weekly report from May 18, “Home in the Range.” Ask your Financial Advisor for a copy or find an advisor. Listen to the audiocast based on this column.