The 1% Move Report

Wealth Management — June 26, 2020

• US stocks fell sharply on Friday as the S&P 500 declined 2.4% to close at 3,009. With the sell-off, the index is now down 6.9% year to date and has corrected 11.1% from the February 19 all-time high.
• Stocks ended the week on a sour note as rising COVID-19 cases and bank stress results weighed on markets Friday. With the sell-off, the S&P 500 finishes the week down 2.9%, and the index moves into negative territory for the month of June with two trading days remaining. This week’s sell-off was likely driven, in part, by concerns over accelerating growth in confirmed COVID-19 cases across the US, with overall growth in new cases in recent days rivaling the highs seen earlier this spring. Apart from the health crisis, bank stocks were also in focus Friday, following Thursday evening’s release of the first round of Fed stress test results.
• All 11 S&P 500 sectors were lower, with Utilities (-1.0%) and Health Care (-1.2%) outperforming the broader market, while Financials (-4.3%) and Communication Services (-4.5%) lagged.
• Rates were lower across the curve, with the 10-year falling to 0.64% as of the 4 p.m. equity close. The yield curve flattened, as 10-year rates fell more than 2-year rates. WTI oil was lower on the session, closing at just over $38 per barrel, while gold rose 0.4%. The US dollar was modestly higher, as measured by the US Dollar Index.  

US stocks declined on Friday as the S&P 500 fell 2.4%. With Friday’s losses, the S&P 500 finishes the week 2.9% lower, and moves into negative territory for the month to date in June. Stocks came under pressure this week as a resurgence in new cases of COVID-19 in the United States has raised concerns around the state of the current health crisis and what it could mean for the economic re-opening underway across much of the United States. Apart from the health crisis, Thursday’s initial release of the Fed stress test results also likely contributed to Friday’s market weakness, with bank stocks notable underperformers on the day. In Thursday’s announcement, the Fed said they would require all banks to re-submit for a second round of testing later this year, and left open the door to dividend cuts while barring buybacks in the coming quarters. Though bank results through the first round of stress tests came through largely positive, the now-introduced uncertainty around the new round of stress tests and potential for curbs on capital return weighed on Financial stocks on Friday. The risk-off action played out across asset classes, with Treasuries rallying sharply across the curve alongside a modest rally in gold, while crude oil sold off during the session.

With this week’s decline, the S&P 500 is now 11.1% 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 earlier this year. 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 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, 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 and stronger-than-expected jump in retail sales and durable goods orders. 

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.