This Week's Market Moves | June 1, 2020
The stock market finished the week higher, with investors becoming increasingly optimistic on the recovery as more states start to re-open their economies. The improved sentiment helped boost the S&P 500 above the psychological 3,000-level and led the Dow Jones Industrial Index to top 25,000 this week. Here are some other insights about which the market is talking.
There are no shortage of opinions on what the recovery will look like as the economy gears back up, but the stock market is way out in front of whatever shape it will be, with the major indices climbing another 3% this week. The Fed’s massive monetary intervention has led to a swift recovery in stock prices, with the S&P 500 index gaining over 35% since the March 23rd low. Remarkably, the S&P 500 index broke the psychological 3,000-level this week, now standing 12.8% above the level where it was one year ago and up another 4.7% in the month of May.
Growth stocks, largely dominated by the high-flying tech sector, have led the stock market’s recovery for much of the last two months. However, optimism about the re-opening of the economy has seen investors rotate into value stocks this week. This has led to the outperformance of a number of beaten down sectors, such as banking, energy companies, airlines, and cruise ships. While it is too early to tell whether this is sustainable, the abrupt shift was notable.
Since the Fed started buying corporate bonds a few weeks ago, it has steadily ramped up its purchases. For the period ending May 27th, the Fed has added an additional $1.2 billion corporate bonds and exchange traded funds (ETFs) to its balance sheet, bringing the total to just under $3 billion. It is no wonder that investment-grade corporate bond spreads have narrowed considerably in recent weeks. This is good news for most active fixed-income bond managers.
Fed officials are beginning to talk more seriously about implementing yield curve controls, a policy tool not used since World War II, to ensure borrowing costs remain near historically low levels. If the Fed decides to adopt this new “tool,” it will allow policymakers to cap interest rates at a targeted maturity for an extended period of time to further support the economic recovery. While unconventional, Japan has been using yield curve controls since 2016 and Australia recently implemented them.
The impact of the coronavirus pandemic has led to a 14.6% decline in earnings in the first quarter, its worst slump in over a decade. While earnings have tanked and forward guidance has essentially dried up, stock prices have continued to march higher. This decoupling is puzzling, as stock prices historically follow trends in earnings. This has led to a sharp rise in the price multiples across many equity market indices in recent weeks. For example, the S&P 500 is currently trading at 21.5 times projected earnings for the next 12 months. This is significantly higher than the 25-year average of 16.3.
Job losses continue to mount. This week, another 2.1 million Americans filed for unemployment benefits, bringing the total to over 40 million who have been displaced during the coronavirus pandemic. Continuing claims, which report workers who are currently receiving benefits, declined by 4 million, bringing the total to 21.1 million for the week ending May 16. This was a surprise and is noteworthy because the decline suggests that some filers may have returned to work as states begin to re-open their economies. While the data remains a long way from normal, it is encouraging news.
Given the severity of the economic collapse, there is very little chance that inflation will take off and get out of control in the near future. Although businesses are starting to re-open, consumer demand will likely remain depressed as long as the unemployment rate stays elevated. While the Fed’s massive money printing in the aftermath of the 2008 financial crisis did not lead to a meaningful rise in inflation, there are concerns that this time may be different. With widespread supply chain disruptions, the potential re-shoring of American businesses and a reinvigorated protectionist push, the longer-term risks are building. However, the bond market has yet to signal reflation is here.
The pandemic has accelerated the demise of many U.S. companies that were already showing signs of financial duress. While retail and energy have been among the hardest hit sectors, no industry has been spared from the economic devastation of the government mandated lockdowns. Some notable companies that have filed for bankruptcy in recent weeks are JCPenney, Neiman Marcus, J. Crew and Hertz.
Tension between the U.S. and China continues to increase. While there were high hopes last year that the relationship was improving, we appear to be entering into a new era. The U.S. is clearly stepping up its efforts to protect national interests from what the administration perceives as China’s numerous wrongdoings. Meanwhile, a border clash between India and China is revving up. Stock markets typically respond poorly to rising uncertainty; however, the market seems to be ignoring this for now.
Indices: Core Bond: Bloomberg Barclays U.S. Aggregate Index, High Yield: ICE BofA US High Yield, Large Value: Russell 1000 Value Index, Large Blend: S&P 500 Index, Large Growth: Russell 1000 Growth, Emerging Markets, MSCI EM NR USD, Foreign Equities: MSCI ACWI Ex USA NR USD, REITs: FTSE NAREIT All Equity, Small Blend: Russell 2000
Note that this article was published on June 1, 2020. Data represented is as of the publication date. The information contained herein has been obtained from sources that are believed to be reliable. However, Cammack Retirement Group does not independently verify the accuracy of this information.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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