Morgan Stanley
  • Wealth Management
  • Mar 25, 2020

The 1% Move Report

Timely commentary on market performance whenever the S&P 500 changes more than 1% in a day.

What Happened in the Markets?

  • US stocks rallied on Wednesday as the S&P 500 climbed 1.2% to close at 2,476. With the rally, the index is now down 23.4% year to date and has corrected 26.9% from the February 19 all-time high.
  • Wednesday’s rally appeared driven, in part, by news out of Washington that Republican and Democratic leaders have agreed to a $2 trillion spending package in an effort to counteract the economic impacts resulting from the spread of the coronavirus. The bill still needs to be voted on in Congress, and stocks did close well off their highs for the session as reports surfaced late in the day that a handful of senators may not support the bill in its current form. Even still, with Wednesday’s gains, the S&P 500 has now rallied in back-to-back sessions for the first time in more than a month, and the Tuesday / Wednesday rally marks the best two-day performance for the index since November 23–24, 2008. 
  • Eight of the 11 S&P 500 sectors were higher Wednesday, with Industrials (+5.3%) and Energy (+4.5%) leading the day’s gains, while Information Technology (-0.3%) and Communication Services (-1.6%) trailed the broader market. 
  • Rates were little changed across the curve, with the yield on the 10-year falling to 0.84% as of the 4 p.m. equity close. The yield curve steepened slightly, as 2-year rates fell more than 10-year rates. WTI oil rose 2.0%, while gold fell 1.3%; the US dollar moved 1.1% lower, as measured by the US Dollar Index. 

 

Catalysts for Market Move

Stocks rallied for a second straight session on Wednesday, as the S&P 500 climbed 1.2% to close at 2,476. The two-day 10.5% rally marks the best two-day period for the index since November 23–24, 2008. This week’s surge comes in stark contrast to last week’s slide; last week was the S&P 500’s worst week in percentage terms since 2008. Optimism has crept back into markets this week as policy makers appear to be moving decisively to address the economic issues at hand as a result of the disruption being caused by the spread of the coronavirus. On Monday, the Federal Reserve unleashed a number of measures designed to stabilize fixed income markets and ensure liquidity flows through the financial system, and it would appear Congress is following through on the fiscal side, with a $2 trillion spending package having been agreed to early Wednesday morning. While the bill still needs to clear votes in Congress before it can be signed by the President, Republican and Democratic leaders announced on Wednesday that there appears to be wide bipartisan support for passage. The bill includes support in the form of loans and assistance for large companies, small and medium-sized businesses, states and local governments, and hospitals. On the individual side, the bill provides for direct payments to lower- and middle-income individuals and families, and expands unemployment insurance benefits. The bill is expected to be taken up in the Senate for vote as early as Wednesday night, before moving to the House for passage later this week.

Markets have been closely watching policy makers in recent weeks for signs of action, as it becomes clearer that the economy will take a near-term hit as a result of the disruption associated with the spread of the coronavirus. More nations and regions have moved toward limiting cross-border traffic and encouraging ‘social distancing’ within their borders, with much of the US and Europe now subject to some type of recommended lockdown. Ultimately, these efforts should help address what is first and foremost a public health concern, but clearly the economic disruption from the virus will be felt in the near term as these containment efforts disrupt businesses and working life. An early gauge of how disruptive the virus could be for the economy may be delivered in tomorrow’s weekly jobless claims report from the Department of Labor. The consensus expectation calls for the report to show that 1.5 million Americans filed for unemployment benefits for the first time last week, which would be a record, with some economists believing the number could be as high as 4 million. This sharp increase in unemployment is likely a result of the “sudden stop” impact the virus/virus response has had on the economy, and underscores the need for fiscal stimulus on the scale currently being discussed in Washington.   

While this week’s gains are welcomed, the recent pickup in volatility remains unsettling. It is important to note, historically big single-day moves in US equity markets to either side have tended to cluster together, and in that respect, recent action has followed the historical script. That also means investors should be prepared for the market to remain volatile in the coming weeks, particularly given the nature of the current market sell-off, which has at least been driven, in part, by anxiety over the unknown as it relates to the spread of the coronavirus. To that end, the market is pricing in volatility to remain extraordinarily high, as measured by the CBOE Volatility Index, or the VIX. The VIX tested its 2008 Financial Crisis highs last week trading above 80, but has since fallen toward the low 60s this week; while the VIX has come down from last week’s high, current levels still imply a near 4% daily average move for the S&P 500 over the next 30 days. From a relative valuation standpoint, equity earnings and dividend yields also look attractive when compared to long-term Treasury rates, suggesting the market has priced in substantial risk, and opportunities may be presenting themselves for long-term oriented investors.   

The Global Investment Committee’s Outlook

The dual shocks of coronavirus and the collapse of OPEC-plus, causing oil prices to fall dramatically, are likely to push the global economy into recession over the next 2-3 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 V-shaped 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, on March 13, the GIC reduced exposures to long-duration Treasuries and began rebuilding exposure to US large-cap growth, US small/mid-cap stocks, and high-quality investment grade credits that are benchmarked to the Bloomberg Barclays US Aggregate. 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 Healthcare 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.

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