The 1% Move Report

Wealth Management — April 3, 2020

• US stocks fell on Friday, as the S&P 500 declined 1.6% to close at 2,489. With the sell-off, the index is now down 23% year to date and has corrected 26.5% from the February 19 all-time high.
• There were a number of headlines for markets to digest on Friday, with energy markets and employment data in focus. Friday morning saw the release of the March non-farm payrolls report, which showed the US economy shed 700,000 jobs last month. While job losses were larger than expected, the figure was perhaps less surprising given the spike in jobless claims seen in recent weeks. Energy markets were also in focus, as reports suggesting several large oil-producing nations may agree to production cuts as soon as next week, sent oil prices rallying more than 10% for a second consecutive session.
• Ten of the 11 S&P 500 sectors were lower Friday, with Consumer Staples (+0.5%) the only positive, while Materials (-2.3%) and Utilities (-3.6%) lagged the broader market.
• Rates were virtually unchanged across the curve, with the yield on the 10-year closing at 0.61% as of the 4 p.m. equity close. The yield curve was little changed. WTI oil rose 12.5% on the session, ending the biggest weekly percentage gain in history for the commodity; gold increased 0.5%; the US dollar was modestly higher, as measured by the US Dollar Index. 

US stocks slid into the weekend, as the S&P 500 fell 1.6% on Friday. Markets had much to digest during the session, starting with the morning’s release of the March non-farm payrolls report. The report showed the US economy shed 700,000 jobs last month, more than the consensus forecast calling for 100,000 jobs lost. While the data came in worse than expected, perhaps it was unsurprising given the recent spike in the weekly jobless claims data. While the recent headlines surrounding unemployment have been staggering, the market’s response has been muted, perhaps suggesting some of the bad news is already in the price. Further, while the spike in unemployment reflects the devastating impact the “sudden stop” in the economy is having on businesses and the labor market, these impacts are likely to be mitigated by the equally dramatic response from policy makers as monetary and fiscal policy measures have been enacted. Outside of the jobs figures, oil markets were in focus Friday, as reports suggest large, global oil-producing nations are planning a meeting next week at which they will discuss potential cuts to output. Oil prices rallied more than 10% for a second day Friday, with WTI oil prices ending the week more than 30% higher from last week’s close.  

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 ~12% 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 spiking above 80, but has since fallen into the 60s last week, and below 50 this week. Importantly, even with Friday’s sell-off in stocks, the VIX did move lower during the session. While the VIX has come down from recent highs, current levels still imply a ~3% 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.