The 1% Move Report

Wealth Management — June 11, 2020

• US stocks traded sharply lower on Thursday, as the S&P 500 fell 5.9% to close at 3,002. With the sell-off, the index is now down 7.1% year to date and has corrected 11.3% from the February 19 all-time high.
• Thursday’s 5.9% decline marks the worst day for the index since March 16. There was no specific headline to point to for Thursday’s slide, though a number of developing issues have likely weighed on markets that already appeared stretched and perhaps susceptible for a pause this week, with the S&P 500 having soared some 40% from the March lows coming into the week, and the NASDAQ Composite having set a fresh all-time high on Monday.
• All 11 S&P 500 sectors were lower Thursday, with Consumer Staples (-3.8%) and Utilities (-4.0%) outperforming the broader market, while Financials (-8.2%) and Energy (-9.4%) lagged.
• Rates were mixed across the curve, with the 10-year falling to 0.66% as of the 4 p.m. equity close. The yield curve flattened, as 10-year rates moved lower while 2-year rates moved higher. WTI oil also fell sharply to just under $36 per barrel, while gold fell 0.6%. The US dollar was modestly higher, as measured by the US Dollar Index. 

US stocks fell sharply Thursday as the S&P 500 shed 188 points, or 5.9%, to close at 3,002. Thursday marked the worst day for the index since March 16, and selling was broad based with all three of the major averages recording 5%+ down moves, and all 11 GICS sectors trading down at least 3% on the day. Thursday’s slide, which continues a now three-day losing streak for the S&P 500, has the index on track to post its worst week since late March. While there is no specific catalyst to point to for this week’s reversal, equity markets may have been due for a pause following a strong rally in recent weeks that saw the S&P 500 briefly return to positive territory for 2020, and the NASDAQ Composite actually make a new all-time high. Against the backdrop of potentially stretched equity markets, several potentially negative developments may have contributed to this week’s reversal. First, growth in confirmed new COVID-19 cases in several states that have recently relaxed lockdown orders is concerning, and reminds us that the health crisis remains dynamic and is still likely far from over. On the economic front, last week’s May jobs report showed surprising strength and this morning’s weekly jobless claims report showed initial claims falling for a 10^th consecutive week. While this data points to the worst likely being behind us from a labor market standpoint, clearly there is still a long way to go in this recovery, with more than 20 million Americans still unemployed. Yesterday’s comments from the Federal Reserve stress just how fragile and uncertain the economic outlook remains, and this realization may also have weighed on markets this week. On a related note, reports this week suggest Congress is unlikely to begin negotiations on potentially expanding or extending unemployment benefits until later, which could amplify concerns around what impact the current elevated level of unemployment could have on the economy should additional stimulus not be enacted.

With Thursday’s sell-off, the S&P 500 is now 11.3% below its previous all-time high of 3,386 on February 19. The index 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 became more tangible this spring, as unemployment rates spiked and consumer and corporate activity fell 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. Early signs of that potential recovery appear to be at hand, with green shoots in recent economic data, including last month’s surprising growth in payrolls.

Over the past 90 days, the S&P 500 has traversed two-and-a-half distinct market phases. The first phase fully discounted the sudden-stop COVID-19 lockdown recession from February 19-March 23 in a -34% bear market drawdown. Second, was the repair phase, which was dominated by “do whatever it takes” and outsized policy moves by both the Federal Reserve and Congress where stimulus totaled almost 47% of GDP and was accompanied by a nearly 60% retracement of the sell-off from March 24-April 30. And, finally the current early innings of the recovery phase, which has been characterized by the faster-than-expected reopening of the economy, has recently allowed the index to surge through 3,000 and its 200-, 100- and 50-day moving averages. Although the GIC has been looking for a V-shaped recovery and a decisive shift in market leadership that has accompanied recessions in the past, and we have been well positioned for recent rotations toward small caps, value style, international stocks and cyclicals like financials, we acknowledge that the market has moved very far, very fast. With some of the easy money having been made off the trough, we think markets remain range-bound for the next 3-6 months as the twists and turns of this particular recession with its dependency on the virus trajectory and the true pace of full economic reopening likely to be opaque and lumpy. In this environment, we are very focused on active security selection with an eye toward valuations and risk premiums in both US stocks and corporate credit. The richness, crowdedness and concentration of the S&P 500 Index, along with our belief that US Treasuries are unattractive and that the US dollar is ultimately poised to weaken, has us also pursuing high levels of asset class diversification with above-average exposures to SMID stocks, international equities and commodities.

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.