The 1% Move Report

Wealth Management — April 22, 2020

• US stocks rallied on Wednesday as the S&P 500 rose 2.3% to close at 2,799. With the rally, the index is now down 13.4% year to date and has corrected 17.3% from the February 19 all-time high.
• Stocks rallied as oil markets bounced off of recent lows and earnings reports in certain technology and consumer discretionary companies came in better than expected.  The tech sector was Wednesday’s big leader, essentially reversing the prior session’s losses. On the political front, the US Senate passed a new $480 billion fiscal stimulus bill aimed at providing additional loans and grants to small/medium sized businesses after the Paycheck Protection Program (PPP) funding was exhausted last week, as well as helping aid the health care sector. The bill moves to the House where it is expected to be passed this week.
• All 11 S&P 500 sectors were higher Wednesday, with Information Technology (+3.9%) and Energy (+3.6%) outperforming the broader market, while Financials (+1.1%) and Consumer Staples (+1.1%) lagged.
• Rates were slightly higher across the curve, with the yield on the 10-year rising to 0.61% 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 20% to $14 per barrel, while gold rose 1.9%. The US dollar was modestly higher, as measured by the US Dollar Index. 

US stocks rose sharply on Wednesday as the S&P 500 gained 2.3%. Wednesday’s rally comes after back-to-back losing sessions for the index, as a collapse in crude oil prices appeared to weigh on financial market sentiment earlier this week. Crude prices stabilized on Wednesday, perhaps contributing to Wednesday’s equity market reversal. Interestingly, even with the dramatic fall in oil, energy stocks have outperformed the broader market this week. Stabilizing oil prices, at least for the day, also may have allowed Treasury rates to move higher following their recent slide, with the 10-year Treasury back above 0.60% in Wednesday’s trading. Outside of oil, corporate fundamentals remain in focus as a busy week of earnings continues; several better-than-expected reports last night also may have contributed to today’s rally. Action in Washington may also have helped improve sentiment today, as the Senate voted to upsize the funds made available to the Paycheck Protection Program (PPP) following last week’s news that the program’s lending capacity had quickly been exhausted given demand from small businesses for loans.

With today’s rally, the S&P 500 now sits roughly halfway between the February 19 all-time high and the March 23 intra-day low, with the index having retraced slightly 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 has 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. On the monetary front, the Fed has gone to extraordinary lengths to provide liquidity and stabilize fixed income markets. On the fiscal front, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law late last month; 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. 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.