Despite the concerns about strained relations with China, increased COVID infections, social protests, weaker earnings, high U.S. unemployment and the November election, the S&P 500 Index is up 1% for the year while the Nasdaq Index is up 19.7%. The increasing spread of the virus is suppressing a healthy economic recovery as consumers and businesses remain conservative in their spending.
The S&P 500 Index has rebounded 35% from the low on March 23 and is now only down 6% year-to-date. The rally was slow and deliberate as the headlines shifted from a virus-induced economic lockdown to a gradual re-opening.
Investors reconsidered the emotionally-oversold market in the month of April and bravely pushed the market higher by 12.7% even before news about the virus infection curve flattening. Since the “shelter-at-home” policies have reduced the infection rate, government policymakers are announcing dates for re-opening the economy. After an economic full-stop and 26 million Americans losing jobs, an economic restart will be a slow process. By staging a deliberately slow ramp-up in economic activity, the government hopes to prevent the healthcare system from being overwhelmed. While Wall Street and the markets are anticipating a “V-shaped” economic recovery, Main Street may experience more of a Nike “swoosh-shaped” recovery.
I wanted to write a note to you about the tremendous first quarter market volatility and the 20% S&P 500 Index decline. This “waterfall” decline was the worst since the 2008 Great Recession and was particularly unusual since the market was trading at an all-time high on Feb. 19. The COVID-19 pandemic is an unprecedented event elevating fear and uncertainty, but it is a transitory event for the markets and the U.S. economy. Meanwhile, we hope you please practice social distancing and stay safe.
The equity and fixed income markets are experiencing unprecedented volatility and fear about the coronavirus. This is a health crisis that has evolved into a financial challenge for policy makers as they attempt to suppress the spread of the virus while not closing down the economy entirely. Unfortunately, the only way to deter the spread of the virus is to reduce or close transportation and impose a quarantine. Since the only way we know to limit the number of infections is to reduce social interaction, we expect more states will join California, Illinois and New York in a “lock down.” For a historical comparison in 2009-2010 the H1N1 “Swine-Flu” virus infected 60 million Americans and killed 12,500, and yet the panic was not as prevalent.
Supported by stable interest rates and optimism regarding the China trade negotiations, the S&P 500 Index rose 28.9% and the Nasdaq Index, with its high information technology weighting, rose 33% for the year. Enthusiasm and expectations for a better economy and strengthening earnings grew as the year progressed. Current equity market valuations look historically elevated with an overall 18x expected Price-to-Earnings ratio, but with few attractive investment alternatives, the financial market gains can continue. There is still over $1 trillion in private equity and hedge fund cash ready to be invested, so even a minor correction would be met with supportive technical buying. The rally was concentrated in the Large Cap technology growth stocks with Mid Cap and Small Cap stocks generally up less significantly. Value stocks like financials, consumer staples, energy and utilities – which are not expected to have significant earnings growth – underperformed during the year.
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