May Market Recap

June 1, 2020

As the calendar turns to summer, temperatures, tensions, and ticker symbols continue to rise.

While the pace slowed compared to the historic gains we saw in April, stock prices generally kept chugging higher in May. Both the S&P 500 and Dow Jones Industrial Average gained more than 4% last month, while the NASDAQ seemingly lapped the field rising almost 7%.

The remarkably swift recovery for equities, in other words, just keeps going. Since its intraday low on March 23, the S&P 500 has now risen 39% and sits only 10% below its all-time high (set February 19). After another exceptionally strong month, the NASDAQ is firmly positive year-to-date and within 4% of its February high.

For the second month in a row, all 11 sectors in the S&P 500 climbed higher. This after two consecutive months (February and March) in which all 11 sectors were negative. Technology (+7.1%) led the charge in May with Materials (+7.0%) and Communication Services (+6.0%) close behind. Consumer Staples (+1.5%), Energy (+1.9%), and Real Estate (+1.9%) gained the least.

Index	May 2020	YTD 2020
Dow	+4.26%	-11.06%
S&P 500	+4.53%	-5.77%
NASDAQ	+6.75%	+5.76%

May was not without its bumps. The Dow suffered its first three-day losing streak since early March, culminating with a 517-point drop on May 13 after Federal Reserve Chair Jerome Powell said the Fed’s economic outlook was “highly uncertain and subject to significant downside risks.”

A few days later, however, Powell’s comments on CBS program 60 Minutes marked a turning point in sentiment. The Dow rocketed 912 points (+3.9%) the day after Powell’s interview, with even larger single-day gains in the Russell 2000 (+6.1%) and crude oil (+11.5%). The fact that several US states began re-opening non-essential businesses certainly contributed to the optimism.

Stock prices in May also jumped more than once on positive developments regarding a vaccine for the COVID-19 virus. While the news is hopeful, medical experts have been quick to remind us that such trials remain in their early stages and it’s unlikely any vaccine will be widely available before 2021.

Growth stocks (+6% in May), tripled the returns of their value counterparts (+2%) last month, although that trend has begun showing signs of a reversal. Small-cap stocks, for example, outperformed meaningfully last month as the Russell 2000 increased 6.4%. As investors start to have more conviction about a strong economic recovery in the second half of the year, the companies and sectors that lagged in recent months have begun to close the performance gap.

The final report card showed a 15% drop in first-quarter earnings for S&P 500 companies compared to a year earlier. Roughly 63% of companies beat consensus forecasts, which sounds constructive but was actually the lowest such percentage of “beats” for any quarter in more than 7 years.

While valuations are admittedly more difficult to calculate with future forecasts so cloudy, there’s little doubt stocks are again trading at lofty numbers. The forward price-to-earnings (P/E) ratio of the S&P 500 finished May at 21.5, according to FactSet. That’s notably higher than the index’s P/E in mid-February, when it traded at 19x forward earnings.

The latest economic numbers showed a mix of good and bad, but provided enough encouraging data for investors to focus on the positives. US consumer spending tumbled almost 14% in April, the largest monthly decline since the government began tracking those numbers in 1959. Jobless claims nationally have eclipsed 40 million, meaning one in four working Americans have lost their jobs since the pandemic began.

Hospitality and transportation data, however, showed meaningful increases in both hotel occupancy and airline travel. New home sales rose more than expected in April. Consumer confidence also moved higher after steep declines the previous two months.

The death of George Floyd at the hands of Minneapolis police on May 25 ignited the flames of protest as Americans all over our country filled the streets demanding justice for the four officers involved, one of whom was arrested and charged with third-degree murder. It’s too early to know how long the civil unrest might linger or whether large groups of public protesters will accelerate the spread of COVID-19, which could bring economic consequences.

The sudden change in the news cycle focusing on Floyd’s death and resulting protests made it easy to overlook important developments between the US and China. Political rhetoric between the world’s two largest economies escalated sharply last month.

Several times, Donald Trump publicly blamed China for not better containing the coronavirus and threatened action if Chinese leaders passed a controversial national security law regarding Hong Kong. When China did pass such legislation late in May, Trump announced a new set of retaliatory measures that include stripping Hong Kong of its special/exempt status on trade and travel.

Speculation is growing about whether the countries’ “Phase One” trade deal will ever be implemented. Given the stock market’s focus on US-China relations in recent years, it’s a topic that could certainly affect investor sentiment in the months to come. Emerging Market equities (+3.0% last month) lagged US stocks in May. Non-US Developed equities (+5.4%) outperformed slightly.

Oil prices nearly doubled in May. West Texas Intermediate Crude finished the month at $35.49 per barrel, up from $18.84 at the end of April. That’s still well-below the January highs of $63 per barrel.

Ten-year US Treasury bonds ended May yielding 0.65% (compared to 0.62% a month earlier).

March Market Recap

April 1, 2020

Books will be written about what happened in America and in financial markets during March 2020.

Last month was historic for many reasons: The official declaration of COVID-19 as a global pandemic, government-mandated closures of schools and businesses, full-scale cancellation of public events, the degree of volatility in equity and bond markets, oil prices falling below $20 per barrel, massive central bank stimulus, and a $2.2 trillion federal rescue package, to name a few.

These are extraordinary times. Our country is facing a public health crisis that has led to an unprecedented economic shutdown. As you would expect, those are conditions that led to an exceptional amount of downward pressure on markets.

For the second consecutive month, all 11 sectors in the S&P 500 were negative. Eight of those suffered losses of 10% or more. Health Care (-3.8%) and Consumer Staples (-5.4%) weathered the storm best. Financials (-21.3%) and Energy (-34.8%) continue to be mired in a downward spiral. The Energy sector has lost more than 50% total in the last three months.

Index	March 2020	YTD 2020
Dow	-13.74%	-23.20%
S&P 500	-12.51%	-20.00%
NASDAQ	-10.12%	-14.18%

The numbers above make it obvious how much damage has been inflicted upon Corporate America and family retirement savings. It’s worth sharing that the final six trading days of March were mostly positive for stocks. While the S&P 500 finished the first quarter 24% below all-time highs, the index has bounced 18% off its March 23 low.

This publication, as its name implies, is traditionally a recap, but in this particular instance, most of our readers probably don’t want or need a line-by-line synopsis of what amounts to a financial injury report. Looking ahead, rather than back, seems a more worthwhile exercise.

It’s important that you know in times of market distress, the members of our Marks Group team are people and resources you can rely on. Our advisors and administrative staff are working harder than ever, whether in our office or from their homes. Our investment committee and portfolio managers continue to actively manage our model portfolios and make tactical adjustments where appropriate.

Much of the near-term future remains uncertain, so I’ll focus the remainder of this letter on what I do know.

1 Current predictions are unreliable

The information superhighway of 2020 makes it easier than ever to read an opinion (or publish your own) about what is next for the stock market and the US economy. The rapid decline of stock prices, which fell 34% peak-to-trough from February 19 thru March 23, seems to have encouraged some especially polarized predictions.

Most agree (Marks Group included) that a US and global recession is near certain. From there, predictions on the severity and length of the economic slowdown vary wildly. Extreme views make for good headlines, but realistically the outcome will be somewhere in the middle. I’d caution investors from having too much conviction one way or the other.

2 We’re still in the early stages of this new reality

Historic volatility has accelerated the pace of this selloff in stocks. Price movements that typically take months have occurred in a matter of weeks or days. On March 24, the Dow spiked 11.4% in a single day. Historically speaking, that’s a good YEAR! From Tuesday through Thursday last week, the S&P 500 rose 20% in three days.

Swings that large make it tempting to conclude we are further along in this new market reality than we really are. Bear markets don’t come and go in six weeks. The coronavirus pandemic that triggered this selloff will, according to the experts, continue to worsen in the coming weeks. The answer to whether March 23 ultimately proves to be the bear market bottom may well depend upon when the virus peaks. Even after we return to our normal lives, questions will linger about a potential relapse and whether consumer spending picks up where it left off.

3 The Fed is all-in

Say what you will about the longer-term risks of adding trillions more to the federal deficit. That’s a legitimate challenge for another year and another administration. As it pertains to the current crisis, the cornucopia of monetary stimulus announced by the Fed in recent weeks is already bigger than previous measures from 2008. Our country’s central bank will do “whatever it takes” to support our economy and our financial markets.

Liquidity injections have already added some measure of calm and helped avoid potential market malfunctions. Historically low interest rates, massive lending, and widescale asset purchasing won’t eradicate the coronavirus, but those policies will help corporations and consumers regain their financial health more quickly once the recovery begins.

4 Investors will have added flexibility this year

The $2.2 trillion fiscal stimulus package passed by Congress last week is meant to act as a life raft to corporations, small businesses, and consumers struggling to survive this widescale economic slowdown. Several aspects of the CARES Act are meant to give investors more flexibility with their money.

Here are some of the highlights:

Direct payments up to $1,200 per individual or $2,400 per married couple, plus an additional $500 per child, courtesy of Uncle Sam. Those payments will decrease for annual incomes over $75k (individuals) or $150k (married).

Enhanced unemployment benefits that will provide more money (up to an additional $600 per week) for a longer period (up to four months) to more people (expanded eligibility) affected by the fallout from COVID-19.

Tax filing deadline for 2019 has been extended to July 15. This applies to federal income tax returns, although most states (including Minnesota) have extended state income tax filing deadlines as well. If you have already filed your return and owe a balance, you have three extra months to settle up.

Required Minimum Distributions from IRA’s have been suspended. For those individuals age 70 ½ or older, you will no longer be required to withdraw money out of your IRA’s or other qualified retirement plans in calendar year 2020. This also applies to those individuals turning age 72 in 2020 who would otherwise have begun taking RMD’s this year.

Elimination of the 10% penalty on IRA withdrawals taken prior to age 59 ½ for “affected persons” meaning health or financial hardship brought on by COVID-19. This applies to distributions up to $100k and is retroactive to include any early distributions already taken since January 1, 2020. Early distributions will still be taxable at ordinary income rates, but the corresponding tax bill can be paid over three years OR the account owner may instead “undo” the withdrawal by paying the dollars back into their IRA within three years following the distribution date.

January Market Recap

February 3, 2020

Military conflicts and public health scares overshadowed the usual economic agenda in January. At month’s end, the stock market was still trying to make sense of the uncertainty caused by the Coronavirus outbreak in China, not to mention the variety of paths forward that could emerge in the wake of Donald Trump’s impeachment, Democratic primaries, and elevated tensions in the Middle East.

Start-to-finish performance in January was relatively benign. The S&P 500 and Dow both lost less than 1%, while the NASDAQ continued to outperform. But the day-to-day equity charts more closely resembled so many New Year’s resolutions at the local gym: A slow and steady climb for the first three weeks, followed by an abrupt fall-off that cancelled out all the hard-earned gains.

Six of the 11 equity sectors in the S&P 500 increased last month, though only three booked gains of 1% or more. Utilities (+6.7%) and Real Estate (+1.4%) were the beneficiaries of falling interest rates. Technology (+4.0%) got an added boost when the sector’s largest names delivered strong earnings.

Five equity sectors delivered losses in January, with Energy (-11.1%) and Materials (-6.2%) hit especially hard.

Index	January 2020	YTD 2020
Dow	-0.99%	-0.99%
S&P 500	-0.16%	-0.16%
NASDAQ	+1.99%	+1.99%

It’s been long ago buried by an avalanche of news, but it was only four weeks ago that a US drone targeted and killed Iran General Qassem Soleimani, sparking a tense military conflict between the two countries. After a few days of national mourning, Iran responded by firing missiles at US-occupied military bases in Iraq, although that response resulted in no deaths.

On January 8, President Trump addressed the nation and suggested Iran was “standing down” from further military engagement, allowing equity markets to effectively shrug off the whole episode and almost immediately return to all-time highs. Later in January, three rockets were fired at the US Embassy compound in Baghdad, injuring one person. It’s a reminder that while a major conflict seems to have been avoided, tensions remain elevated.

On January 15, China’s chief trade negotiator and US officials put pen to paper in Washington, formalizing “Phase One” of their trade agreement. The deal, which had been agreed to in principle for three months, eliminated new US tariffs on Chinese goods but resulted in only limited rollbacks of tariffs already in place. By the end of January, China was already requesting added flexibility regarding some of its Phase One pledges as the country grapples with containing the Coronavirus amid a public health crisis.

That outbreak, which began in the city of Wuhan, has so far resulted in 362 reported deaths and more than 17,000 infections, according to China’s Health Commission. The death toll is already higher than that attributed to the SARS outbreak in 2002-03.

From an investment standpoint, health scares and pandemics have universally proven to be only temporary setbacks, but an outbreak that has yet to be contained certainly has the potential to affect investor sentiment and trigger a spike in volatility. We saw evidence of that late in January. The Dow fell 454 points on January 27 and another 603 points on January 31.

Roughly halfway through fourth-quarter earnings season, the scorecards for most S&P 500 companies have revealed better-than-expected numbers. About two-thirds of the reporting companies have beaten consensus estimates, and cumulative earnings are on pace to decline only 0.3% from a year earlier (compared to median forecasts of a 1.6% decline). With so many non-financial headlines dominating the news cycle, perhaps it’s no surprise that earnings beats and misses have both resulted in smaller-than-average price swings in their underlying stocks.

The Federal Reserve made no changes to the Fed Funds rate at its late January meeting. Consensus expectations call for the Fed to remain neutral with monetary policy for the first half of 2020. It was hardly a benign month for rate movements, however. Ten-year Treasury yields fell sharply in January, closing at 1.52% (compared to 1.92% at year-end). Yields are approaching all-time lows (1.34%) set in July 2016.

Emerging Market stocks and oil prices both sank in January as the spread of Coronavirus put a major dent in Chinese energy demand. After peaking above $63 per barrel on January 6, West Texas Intermediate Crude fell all the way to $51.56 per barrel at month’s end. WTI Crude last traded below $50 in December 2018. As a category, Emerging Markets fell 6.2% last month.