US Markets Hit New Highs as Covid-19 Cases Decline
Defying the coronavirus pandemic’s mounting human and economic toll, US stocks closed at a record high on Tuesday, bringing an end to the shortest stock bear market in US history. After moving higher in recent weeks, the S&P 500 index closed at 3,389 in yesterday’s trading session, capping a remarkable recovery from the March selloff that slashed 34% off the previous record from 19th February.
The rally came as investors brushed aside concerns about the nation’s continuing struggle to contain the pandemic, while focusing on signs of strength emerging in the housing and retail sectors. The pandemic continues to have a significant impact on the US economy, with 43,999 new cases of the virus being recorded as of yesterday, while total deaths so far surpass 175,000. That being said, data compiled by John Hopkins University suggests that overall, new cases and hospitalisations are beginning to decline across the US, providing investors with some optimism that efforts to contain the outbreak across the country could be starting to bear fruit. This optimism helped US markets to surge above the previous record in their last trading session.
Megacaps Lead the Way
While the index has rallied in recent months, the financial rewards of the latest surge have been very uneven, with megacap tech stocks leading the index higher as investors wager on their ability to deliver strong growth unhindered by economic shutdowns. The milestone came one day after the tech-heavy Nasdaq index posted its own record. Prior to the market open yesterday, President Trump tweeted “Jobs are flowing, NASDAQ is already at a record high, the rest to follow. Sit back & watch!”. While the President’s optimism is unlikely to have had a direct impact on sentiment over the day, it highlights the optimism over a post-lockdown recovery. The Dow Jones Industrial index remains around 5% below its February peak, with industrial stocks still facing a steep climb to recovery.
Better or Worse, Not Good or Bad
While the record is just a number, the rise in the stock market suggests that investors see a recovery on the horizon, with markets focusing on better or worse data, rather than good or bad – and the leading economic indicators continue to improve. Moves in the market often presage moves in the economy, therefore a strong rebound for stocks could indicate a strong economic rebound. That being said, the last time US stocks were at these levels, the world looked a lot different than it does today. But despite the challenges, the rally indicates that investors are positive on the direction of the economy emerging from the Covid-19 crisis. Volatility remains high, however the long-term story is that markets remain resilient and maintain upward momentum, aided by government and central bank support in recent months.
According to the Bank of America Fund Manager survey for August, global growth expectations among fund managers are the highest since 2009, with investors the most bullish on equities since then. While it seems counterintuitive that the index should reach a record high amidst a pandemic, we must also consider growth expectations moving forward on the recovery against a backdrop of further fiscal and monetary stimulus while yields on risk off assets and cash remain extremely low. This has resulted in a lack of options for asset managers which is often referred to as the ‘Tina (there is no alternative) Effect’ whereby stocks rise as a result of a lack of viable alternatives.
Away from the US, markets elsewhere have been less buoyant, with European equities stuck near the same levels they were two months ago, reflecting continued virus concerns and a more gradual economic recovery. It is clear that until a vaccine is available, uncertainty will continue to weigh on the recovery on a global scale, with the medical newsflow continuing weigh heavily on market sentiment on an intraday and intraweek basis. With a number of prominent vaccine candidates currently in third stage clinical trials, there is optimism within the market that a vaccine may be approved for use by next year.
For more information on key vaccine candidates and market expectations, please see the attached Market Update Document
After a rapid initial recovery, recent labour market figures suggest that the US recovery may be waning, while business investment and consumer spending remain low. This suggests that the continued challenge to contain the Coronavirus outbreak across the US has caused the recovery to lose some momentum, with uncertainty weighing heavily on the economy. Against that backdrop, while sentiment remains positive as economic fundamentals improve from a low base, any signs of improvement in daily virus cases are likely to create optimism in equity markets over a faster pace of recovery. At the same time, markets remain supported by stimulus and a lack of alternatives for investment managers, while optimism over a potential vaccine also lingers, contributing to push markets higher on the improving medium term outlook.
While this week’s record high US index levels combined with an improving health situation suggest that a strong recovery could be ahead in the coming months, it should be noted that the US economy is not yet out of the woods on the health side of things, and key risks remain in terms of US-China trade tensions while the November Presidential Election is fast approaching. At the same time, the recent outperformance of megacap tech stocks has raised concerns over a potential rotation from growth to value moving forward, with growth stocks now trading at extremely high valuations. Therefore, while momentum remains positive and the outlook remains strong for the US in the medium term, we take an underweight position versus the benchmark, allowing us to participate in the recovery, while allocating more to areas where we see greater return opportunity moving forward on the recovery. At the same time, we have recently added exposure to value stocks, which are positioned to benefit from a rotation from growth to value as the recovery becomes more broad-based within the market.
Key Events We Are Watching This Week:
- Thursday: US Jobless claims, China’s loan prime rate
- Friday: Euro-area, US & UK PMIs for August, UK Retail Sales for July
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document and the Economic Dataset below.
Model Portfolios & Indices
Global stock markets continued to display high levels of volatility over the week as countries across the world battle with virus challenges, mixed economic data, and stimulus expectations. Over the week, the major indices experienced mixed performance on rising virus cases and mixed economic data which varied significantly between regions. The portfolios remained relatively robust in the face of market volatility over the week, benefitting from a high level of diversification in asset classes and geographies. Looking ahead, we are optimistic on the medium-term outlook from here, accepting further volatility in the near term, but confident in our positioning, with well diversified portfolios which have been designed to weather these market conditions. Year to date, we have now recovered from the March coronavirus decline, and we are in a strong position moving forward.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
This Day in History
On this day in 2004, the search engine Google Inc. raised $1.66 billion in its initial public offering; in an unusual move, the shares were sold in a public auction intended to put the average investor on an equal footing with financial industry professionals.
Have a great week,
Jason & Gina