The 1% Move Report

Wealth Management — May 8, 2020

• US stocks traded higher on Friday as the S&P 500 rose 1.7% to close at 2,930. With the rally, the index is now down 9.3% year to date and has corrected 13.5% 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. While the April jobs report came in roughly as poor as expected, with a record 20 million jobs lost last month, markets rallied anyway, suggesting perhaps the current bleak economic data has already been priced in.   
• All 11 S&P 500 sectors were higher Friday, with Energy (+4.3%) and Industrials (+2.5%) outperforming the broader market, while Information Technology (+1.4%) and Health Care (+0.5%) lagged.
• Rates were higher across the curve, with the yield on the 10-year rising to 0.67% 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 4.4%, to just over $24 per barrel, while gold fell 0.5%. The US dollar was modestly lower, as measured by the US Dollar Index.

US stocks rallied on Friday as the S&P 500 gained 1.7%. With the rally, the S&P 500 is down 9.3% on the year, while the NASDAQ composite is up over 1% for 2020. Equity markets have been resilient this week, even in the face of staggeringly poor economic data, perhaps best encapsulated by this morning’s jobs report, which showed a record 20 million jobs were lost last month, as well as the unemployment rate surging to 14.7%. While it may seem like stocks are diverging from the economy, markets tend to be forward looking. This week’s rally in equities perhaps suggests the bad news in the labor market was already priced in, and that markets may now be looking forward to an economic recovery later this year, as the US and world move toward re-opening, following the various lockdowns that have been imposed in recent weeks and months. With stocks having rallied more than 30% off of the March lows, however, clearly more “good news” is now in the price, and the pace of any economic recovery in the second half of the year will matter for the path of equities from here. Outside of the economic data, energy stocks and oil markets were a big part of this week’s narrative, as oil prices have rallied following last month’s collapse, and energy stocks continued to outperform this week; on Friday, the energy sector was once again the strongest performing of the S&P 500 components, rallying more than 4% on the session. 

With Friday’s rally, the S&P 500 is just 13.5% 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 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.