The S&P 500 Index has rallied mightily off of its March 23 low, climbing almost 40% through the close of the market yesterday, as market participants look ahead to the economy continuing to gradually reopen. While there are signs that bond market participants’ overall assessment of the economy is slowly edging toward a similar outlook, it’s hard to call them true believers yet.
2020 is only five months old, but in many ways it is one of the most historic years we’ve ever seen. “2020 went from moving along nicely, to seeing the worst recession in a generation and the fastest bear market ever,” explained LPL Financial Senior Market Strategist Ryan Detrick. “Now stocks are in the midst of one of the best bull runs ever, even though the economy remains extremely weak, thanks to record stimulus and hopes over a vaccine.”
Dear Valued Investor,
“Never confuse a single defeat with a final defeat.” — F. Scott Fitzgerald
The economic struggles in our country are among the worst we’ve ever seen. In April, a record 20 million people lost their jobs, and 36 million people have filed for unemployment since the COVID-19 pandemic struck in mid-March. Record drops in consumer confidence, manufacturing, and spending are all adding to the immediate economic fallout. Specific industries have been devastated, with names like J.C. Penney, J.Crew, and Neiman Marcus filing for bankruptcy.
As we discussed in earlier this week in Markets Due for a Pause, there were multiple technical reasons to believe that US equities were due for some sort a pullback following a more than 30% rally from the March 23 lows. Technical resistance near the 2935 level for the S&P 500 Index, declining participation, and seasonal headwinds all suggested a near-term downward bias.
The number of COVID-19 tests in the US has ramped up significantly, which is a major step to defeating this terrible pandemic. “We know we need more testing to help quickly isolate those infected, and last week we had more than 300,000 tests on consecutive days for the first time ever,” said LPL Financial Senior Market Strategist Ryan Detrick. “What is even better news is the percentage of positive tests has been trending lower, even as more testing has ramped up.”
Dear Valued Investor,
Investors like labels for the economy and financial markets—many of them with the word “great” in them. The Great Depression. The Great Recession. The Great Lockdown. Well, we’ve moved into what we might call the Great Disconnect. How can stocks have rebounded so strongly in the last month amid so much suffering and economic damage? What’s Wall Street seeing that so many on Main Street are not?
The last week of April was a big news week. A very weak first quarter GDP highlighted a busy economic calendar. Investors digested a flurry of earnings reports, including some of the biggest names, such as Apple, Amazon, Facebook, and Microsoft. Gilead Sciences released promising test results for a COVID-19 treatment, a positive step in potentially limiting the human and economic impact of the virus as some states began to reopen their economies. Finally, we heard from three major global central banks.
One of the best known investment axioms is to “sell in May and go away.” This is largely because these six months have historically been some of the worst six months of the year. As you can see below, the next six months have tended to be on the weak side.
The Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of Japan (BOJ) all met in the last week and while the show of power was minimal compared to recent weeks, they collectively reasserted their resolve to do whatever is necessary to support the global economy through the COVID-19 economic crisis. Rates are being held about as low as they can go, significant new programs to enhance market liquidity and support lending are in place, and, as shown in the LPL Chart of the Day, asset purchases have accelerated. In fact, with April not yet completed, central bank assets have risen over $3 trillion, the biggest two-month jump on record.
Over the past couple of weeks, we have thankfully witnessed new cases of COVID-19 in the US trending lower. Increasingly, we are also seeing governors implementing plans to re-open their state economies in phases. If the US economy continues to open up and economic growth starts to rebound, relative performance of stay-at-home growth stocks may level off or even reverse.