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Market update: Have markets distanced themselves from the economy?

Anthony Saglimbene, Ameriprise Global Market Strategist

As of 5/18/2020


Looking back

  • In April, U.S. stocks posted their best monthly performance in more than three decades
  • The U.S. economy contracted quarter-over-quarter for the first time in six years.
  • More than 20 million Americans lost their jobs last month.

Up ahead

  • An increasing number of states are reopening for business and relaxing stay-at-home orders.
  • Stocks are looking ahead to a slow, choppy economic recovery to start in the second half of the year, with variation across regions.
  • Investors should maintain modest return expectations.

 

Markets are pricing in better days ahead

After tumbling roughly 34% from its market top in March, the S&P 500® Index finished its best April in more than 30 years, rising 12.8% on a total return basis. Cyclical areas like energy, consumer discretionary, materials and technology charged higher, as market optimism grew over reopening the U.S. economy. International stocks also posted solid returns in April, seeing their best month since 2009. 

Despite the stock market's optimism, the U.S. Department of Commerce reported that gross domestic product (GDP) contracted 4.8% in the first quarter. Additionally, the U.S. economy lost a staggering 20.5 million jobs in April, as the unemployment rate skyrocketed to 14.7% from 4.4% in March. April's unemployment rate surpassed the post-World War II record high of 10.8% in November 1982. 

Importantly, the S&P 500 in 2020 is down roughly 10% — during a global pandemic, in a country that is still primarily locked down and amid some of the worst economic conditions in modern history. Manufacturing and services activity has ground to a halt, and COVID-19 has thrown corporate profits and business visibility into a tailspin. 

First quarter profit reports have been negative, and we expect earnings to be even worse in the second quarter. Current analyst estimates call for S&P 500 earnings per share (EPS) to decline by roughly 40% in the second quarter. This, coincidentally, is how much we believe the U.S. economy could contract in Q2. 

Given the pressured state of current and near-term conditions, some may ask, “Why have stock prices shown so much resiliency?”

Below is our take on the stock market's strength given these unprecedented times:

  1. In our opinion, stocks have not distanced themselves from the economy. Instead, markets are pricing in a recovery beginning in the second half and an economic backdrop that looks materially better than it does now. Simply put, the market’s worst fears have not materialized, and for now, it believes the future will be brighter than the present.
  2. The U.S. Federal Reserve backstopped the economy and Congress rose to the occasion when required to do so. Fed lending programs and other accommodative measures combined with government aid packages could help small businesses and consumers hang on until more of the economy reopens. The willingness of the Fed and Congress to do more if needed also increases the chance the economy will eventually navigate its way through this crisis.
  3. Importantly, the "market" is not nail salons, hairdressers, local retailers, and restaurants. Across these smaller businesses, the outlook is less certain. But S&P 500 companies and even many companies in the Russell 2000 Index are significant public entities, with ample access to credit and liquidity.
  4. Several of the largest S&P 500 constituents have seen their business trends improve or have avoided a significant disruption during the economic shutdown. Big tech companies account for more than 20% of the index. In several instances, these companies saw improved business trends due to work-from-home/stay-at-home policies, which drove increased online, cloud computing, browsing and shopping traffic. The S&P 500's top-heavy allocation to companies that have maintained a dominating edge through the uncertainty is one reason the U.S. stock barometer has remained so resilient this year.
  5. Lastly, the outlook for a COVID-19 treatment or vaccine in 2020 has improved. As a result of a government-sponsored program to speed the development of a virus vaccine and notable positive trials on Gilead Science's Remdesivir treatment, markets have moved higher over recent weeks. Stock prices, in some respect, currently reflect a back half of the year outlook, where consumers reduce their social distancing behaviors and are less fearful of going out in public.

Combined, we believe the dynamics outlined above contributed to the overall resiliency across the stock market. But for now, we have muted return expectations through year-end. Investors need a clearer picture of how well the economy reopens and how virus trends progress downward. 

If the market's more optimistic view of recovery begins to take shape in the second half as expected, we believe stocks have more upside room from here. However, given the uncertainty of the situation, risks are skewed to the downside, in our view. Importantly, markets may have a harder time looking to a brighter future if the economic and corporate evidence continues to point toward a harsher reality.

Stay focused on your strategy and reach out to an Ameriprise advisor with any questions or concerns about your portfolio.

All performance, economic, and earnings data sourced from FactSet unless otherwise stated

The numbers

Indices

As of May 8, 2020

Data source: Morningstar Direct

 

 

S&P sector returns YTD

The views expressed in this publication reflect the personal views of the Ameriprise Financial Services analyst authoring the publication. The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial concerns.

RISK DISCLOSURES

Investing involves risk including the risk of loss of principal.

Past performance is no guarantee of future performance. 

Investments in narrowly focused sectors may exhibit higher volatility than investments with broader objectives. An investment in a sector is subject to market risk economic risk, and mortgage rate risk.

Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.

There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.

In general, equity securities tend to have greater price volatility than debt securities. The market value of securities may fall, fail to rise or fluctuate, sometimes rapidly and unpredictably. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole.

INDEX DEFINITIONS

Standard & Poor’s (S&P) 500 Index
The S&P 500 is a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value (shares outstanding times share price), and its performance is thought to be representative of the stock market as a whole. The S&P 500 index was created in 1957 although it has been extrapolated backward to several decades earlier for performance comparison purposes. This index provides a broad snapshot of the overall U.S. equity market. Over 70% of all U.S. equity value is tracked by the S&P 500. Inclusion in the index is determined by Standard & Poor’s and is based upon their market size, liquidity, and sector.  

Dow Jones Industrial Average 
The Dow Jones Industrial Average (The Dow), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

Russell 2000 Index
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. The Russell 2000 includes the smallest 2000 securities in the Russell 3000.

MSCI EAFE Index
The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. As of June 2, 2014.

MSCI Europe Ex UK
The MSCI Europe ex UK Index captures large and mid-cap representation across 14 Developed Markets (DM) countries in Europe. With 337 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across European Developed Markets excluding the UK.

MSCI United Kingdom
The MSCI United Kingdom Index is designed to measure the performance of the large and mid-cap segments of the UK market. With 109 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the UK.

MSCI Emerging Markets Index
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. As of June 2, 2014.

Bloomberg Barclays US Aggregate Bond Index (Abbreviated as Bloomberg US Agg in table)
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).

Bloomberg Commodity Index
Formerly known as the Dow Jones UBS Commodity Index. The Bloomberg Commodity Index is calculated on an excess return basis and composed of futures contracts on 22 physical commodities. It reflects the return of underlying commodity futures price movements.

Dow Jones U.S. Select REIT Index
The Dow Jones U.S. Select REIT Index intends to measure the performance of publicly traded REITs and REIT-like securities. The index is a subset of the Dow Jones U.S. Select Real Estate Securities Index (RESI), which represents equity real estate investment trusts (REITs) and real estate operating companies (REOCs) traded in the U.S. The indices are designed to serve as proxies for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.

The S&P 500 Industrials Select Sector Index measures the performance of industrial stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

The S&P 500 Information Technology Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) information technology sector.

The S&P 500 Materials Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) materials sector.

The S&P 500 Real Estate Index comprises stocks included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS)® real estate sector.

The S&P 500 Utilities Select Sector Index measures the performance of utility stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

The S&P 500 Energy Select Sector Index measures the performance of energy stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market-capitalization-weighted.

The S&P 500 Consumer Staples Select Sector Index measures the performance of consumer staples stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

The S&P 500 Consumer Discretionary Select Sector Index measures the performance of consumer discretionary stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

The S&P 500 Health Care Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) health care sector.

The S&P 500 Telecommunication Services Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) telecommunication services sector.

IMPORTANT DISCLOSURES

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

Ameriprise Financial Services, LLC. Member FINRA and SIPC.