The 1% Move Report

Wealth Management — June 30, 2020

• US stocks traded higher on Tuesday as the S&P 500 rose 1.5% to close at 3,100. With the rally, the index is now down 4.0% year to date and has corrected 8.5% from the February 19 all-time high.
• With Tuesday’s rally, the S&P 500 has posted back-to-back 1%+ rallies to begin this holiday-shortened week (US markets are closed on Friday in observance of July 4^th). While last week stocks sold off on virus spread concerns, better-than-expected US economic data has helped turn the tide this week. Monday’s pending home sales report showed sales surged by a record 44% month-over-month in May, and Tuesday’s Conference Board Consumer Confidence reading showed the highest month-over-month increase since 2011. Collectively, recent economic data points to a recovering US consumer that could help drive a broader economic recovery as the second half of the year begins.
• All 11 S&P 500 sectors were higher, with Energy (+2.2%) and Information Technology (+1.9%) outperforming the broader market, while Industrials (+0.7%) and Utilities (+0.4%) lagged.
• Rates were higher across the curve, with the 10-year rate rising to 0.66% as of the 4 pm equity market close. The yield curve steepened, as 10-year rates rose more than 2-year rates. WTI oil moved lower but stayed above $39 per barrel, while gold rose 0.4% to $1,780 per ounce. The US dollar was modestly lower, as measured by the US Dollar Index. 

US stocks rallied on Tuesday as the S&P 500 rose 1.5%, with stocks rallying by more than 1% for a second consecutive session to start the week. While last week markets sold off as rising COVID-19 case counts in several US states raised concerns around what the pace of re-opening could look like, this week markets have recovered. While the health crisis remains uncertain, this week’s sentiment boost has likely been driven at least in part by better-than-expected economic data, particularly as it relates to the US consumer. Monday saw a record breaking month-over-month increase in May pending home sales, while Tuesday saw a surge in the Conference Board Consumer Confidence reading. Collectively, recent data around the US consumer, retail sales and housing all offer reasons for optimism, with consumer activity picking up markedly last month as lockdowns receded across much of the US. A strong US consumer is a key tenet of the “V-shaped” recovery thesis, and recent data supports the view that a US consumer recovery could help drive a broader economic recovery in the second half of 2020. Economic data will remain in focus in the coming days, with the June ISM manufacturing survey results due out Wednesday morning, and the June Non-farm Payrolls report out on Thursday. US markets will be closed on Friday in observance of the July 4^th holiday.

With today’s rally, the S&P 500 is now just 8.5% below its previous all-time high of 3,386 on February 19. After falling 20% in the first quarter of 2020—the worst quarter for the index since 4Q 2008—the S&P 500 has now finished the second quarter having rallied back 20%—the best quarter for the index since 4Q 1998. While markets corrected sharply this spring as the COVID-19 pandemic drove the US and global economies into recession, stocks have bounced back almost as rapidly, as markets look to what could be an economic recovery in the second half of 2020. While the health crisis has wreaked havoc on the economy and driven a near unprecedented spike in unemployment, policy makers have reacted, 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 apparent in the recent economic data. 

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.