FINANCIAL MARKET UPDATE 6.16.2020

STORY OF THE WEEK

MAKING SENSE OF RECENT MARKET MOVES

The market hit a small milestone last Monday (6/8) when the S&P 500 moved back into positive territory for 2020. Time spent in the green was short-lived, however, as volatility returned soon after and culminated in a nearly 6% drop for the index on Thursday (6/11). When a single-day move of this magnitude occurs, it is human nature to want to understand why it happened. Before we dive into what may have been behind it, let’s take a step back and broaden our view of what has been happening in the markets.

After bottoming on March 23rd, stocks have been on an absolute tear. The economy, meanwhile, has yet to see a meaningful recovery. This disconnect has led to considerable confusion among investors, but there are a number of factors that are likely supporting the rally: 

  1. We Appear To Have Avoided The Worst-Case Scenarios Related To The Pandemic (at least thus far)
  2. Monetary Stimulus From The Federal Reserve
  3. Unprecedented Fiscal Stimulus
  4. The Slow Reopening Of The Economy
  5. Signs Economic Data Is Beginning To Improve
  6. Potential Progress In COVID-19 Treatments/Vaccines

The stock market is forward-looking, and prices reflect expectations for the future. For this reason, it is considered a “leading indicator” for the economy. This concept explains why the S&P 500 began to sell off in mid-February, despite confirmed COVID-19 cases and strict social distancing measures not ramping up until mid-March. The factors above have improved the market’s outlook for the future. So while stocks previously fell ahead of the economic downturn, they are now rising ahead of the economic recovery.

To say the market has been on a tear does not do this rally justice. The gains we have seen recently are actually of historic proportions. If you looked at rolling 50-day returns for the S&P 500, the period ending on June 3rd saw the largest return since the 1930s!

S&P 500: Rolling 50 Day Returns

      Date    | Return1

09/07/1932: 108.74%

06/02/1933: 72.57%

07/26/1938: 35.84%

03/06/1975: 26.88%

10/21/1982: 35.77%

05/19/2009: 34.23%

06/03/2020: 39.58%

With this backdrop, let’s turn our attention to the volatility we saw last week. There are two commonly cited reasons for the nearly 6% pullback on Thursday:

  1. A cautious outlook from the Federal Reserve following last week’s FOMC meeting
  2. Reports of new COVID-19 cases accelerating in parts of the U.S. and China

Both factors above appear perfectly logical and likely contributed to the decline, but I think there is a simpler explanation:

  1. The market rallied too far too fast

After delivering the most extreme short term gain in 80 years, the market needed a breather. It is not uncommon for stocks to gain so much momentum that they become overextended. When this occurs, it generally does not take much to upset the apple cart. In this instance, it was the Fed outlook and COVID-19 cases. Still, it could have just as easily been other news, including a bad economic data print, a wave of corporate defaults, diminished expectations for additional fiscal stimulus, failed vaccine trials, and so on. The key point is that a pullback after a strong rally is both normal and healthy.

It is human nature for investors to want to understand the cause behind large market moves. Perhaps the only question they want answered more is: where do we go from here? The market rally could pick up right where it left off, or it could be the start of a painful journey back to the lows. Any investor that knew with certainty how all of this would unfold would profit handsomely, but of course, that is not possible. As such, the most profitable strategy, on average, is likely to be staying disciplined.  

 

1: Returns are cumulative and are based on the S&P 500 PR index (excluding dividends) going back to 1928. Only the peak return within each rallying period is illustrated.  

WEEK IN REVIEW

  • Retail sales jumped by 17.7% in May, logging the largest ever month over month increase and handily beat economists’ estimates. The increase is a very positive sign, as the U.S. economy is largely powered by consumption. Despite the strong print, retail sales remain below pre-COVID levels.
  • Last week the Federal Reserve voted to keep short-term interest rates near zero during its two-day meeting of the Federal Open Market Committee (FOMC). The post-meeting statement indicated that the Fed “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” Included with the statement was the committee’s estimates on economic growth (GDP), which they expect to decline by 6.5% in 2020, before rising by 5% in 2021 and 3.5% in 2022.
  • Other market moving news this week includes the Federal Reserve’s announcement yesterday that they will begin to purchase individual corporate bonds in the secondary market (something it pledged to do in March), a recent study found that the steroid Dexamethasone can reduce mortality rates among critically ill COVID-19 patients, and finally, Fed Chairmen Jerome Powell began two days of congressional testimony today on the current status of monetary policy (he has the ability to move markets every time he speaks publicly). 

HOT READS

Markets

  • U.S. May Retail Sales Surge 17.7% in the Biggest Monthly Jump Ever (CNBC)
  • Record Percentage of Investors Say Stocks are Overvalued, According to BofA Survey (CNBC)
  • Powell Warns of ‘Significant Uncertainty’ about the recovery and says small businesses are at risk (CNBC)

Investing

Other

  • Scientists Hail Dexamethasone as ‘Major Breakthrough’ in Treating Coronavirus (CNBC)
  • How Clean Is The Air on Planes? (CNTraveler)
  • With Real-Life Games Halted, Betting World Puts Action on E-Sports (NYT)

ECONOMIC CALENDAR

Source: MarketWatch

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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