The 1% Move Report

Wealth Management — April 2, 2020

• US stocks rallied on Thursday, as the S&P 500 closed up 2.3% at 2,527. With the sell-off, the index is now down 21.8% year to date and has corrected 25.4% from the February 19 all-time high.
• Thursday’s rally comes as markets digested a number of headlines throughout the session. Oil markets were strong with crude oil prices rallying 20%+ following headlines this morning that suggested Saudi Arabia and Russia may return to the negotiating table, alongside other global producers, to discuss output cuts. Energy shares led the market higher during the session, with the S&P 500 energy sector rallying 9%. Jobs data was also in focus Thursday, with another staggering week of initial jobless claims, as more than 6 million Americans filed for unemployment benefits for the first time last week. The jobs market will remain in focus, with Friday’s non-farm payrolls release in the US.
• All 11 S&P 500 sectors were higher Thursday, with Energy (+9.1%) and Utilities (+3.1%) the relative outperformers, while Real Estate (+1.3%) and Consumer Discretionary (+0.4%) lagged the broader market.
• Rates were slightly higher across the curve, with the yield on the 10-year rising to 0.62% as of the 4 p.m. equity close. The yield curve was little changed. WTI oil rose 21.7%, the second biggest daily gain ever; gold increased 1.4%; and the US dollar was modestly higher, as measured by the US Dollar Index. 

US stocks rallied on Thursday, as the S&P 500 gained 2.3%. Thursday’s rally appeared driven, in part, by strength in crude oil, as oil markets surged on the back of reports that Saudi Arabia, its OPEC allies, Russia, and other major global oil producers may be considering output cuts in an effort to stabilize oil markets. While the breakdown in the production cut agreement between Saudi Arabia and Russia last month sent oil markets sharply lower on supply concerns, today’s reports suggest perhaps relief on the supply front could be possible in the near term, though markets will still face significant demand headwinds as a result of the “sudden stop” in the global economy. Outside of the oil headlines, employment data is in focus this week, with Thursday’s weekly jobless claims report showing a record 6 million Americans filed for unemployment for the first time last week. Friday will see the release of the March non-farm payrolls report, which will likely also show a sharp increase in unemployment last month. While these employment figures may be staggering, they are not entirely unexpected as the global economy deals with the “sudden stop” brought about by COVID-19, and importantly, this spike in unemployment may be mitigated by actions from policy makers in the US last week. 

Last week a one-two punch of monetary and fiscal policy was delivered in the US, as policy makers look to confront the current economic challenges. On the monetary front, last Monday the Federal Reserve announced a slew of new initiatives aimed at stabilizing fixed income markets in an effort to ensure liquidity flows through the financial system. On the fiscal front, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law last Friday evening; the CARES Act calls for $2 trillion+ in federal assistance and loans for those individuals, businesses and organizations most affected by the “sudden stop” in economic activity caused by the spread of the coronavirus. As it has become clearer in recent weeks that the economy will take a near-term hit as a result of disruption associated with the spread of the coronavirus, markets have seemingly been calling on policy makers to act, as both fiscal and monetary policy will likely be needed to address the economic risks at hand; with the enactment of the CARES Act alongside unprecedented levels of monetary support offered by the Federal Reserve, it would appear policy makers are answering that call.  

While markets have struggled for much of the past six weeks as the virus and its economic-related impacts have spread across the globe, last week’s decisive action from US policy makers may have changed the tide; the S&P 500 has now rallied ~15% since last Monday’s intra-day low. This comes after a period in which the S&P 500 failed to rally in consecutive sessions in more than a month of trading. That said, the pickup in volatility remains unsettling. 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 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 in mid-March trading above 80, but has since fallen toward the mid-60s last week and below 60 this week; while the VIX has come down from recent highs, current levels still imply a ~3.5% 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 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 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 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 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.