Top Weekly Themes
- It’s official: Last Monday, the National Bureau of Economic Research (NBER) announced that the U.S. entered a recession in February. The Bureau defines this as “a significant decline in economic activity spread across the economy, normally visible in production, employment, and other indicators.” Given this definition, with much of the economy effectively closed for the past two months, the announcement by the NBER surprised few. In evaluating the just-ended expansion, it was literally one for the record books, spanning 128 months. This ranks as the longest expansion since 1854, surpassing the prior longest-running expansion of 120 months, which took place mostly during the 1990s. While the Bureau makes no estimate as to the length of the recession currently underway, in spite of last week’s selloff, recent market action would lead one to believe that equity investors believe its duration will be very short.
- Stock market is a V, at least as of last Monday: Over the past couple of months, economists have debated the likely path of the economic recovery and the figure (V, U, W, √, etc.) it will most resemble on a chart. While the path for a full recovery of the economy is as yet unknown, for the S&P 500 the answer for at least a day was a “V.” From the outset of the year until its closing low on March 23, the S&P 500 Index declined a staggering -30.4%. By last Monday, that damage had been fully reversed. Over just 53 trading days, the S&P 500 fully overcame its year-to-date losses and inched back into positive territory. The move into the green proved to be short lived, however, as the S&P 500 ceded ground over the next three trading days and by the close of trading on Thursday was back to showing a negative total return for the year of -6.2%. After the big recovery, the decline from Monday’s close was attributed to profit taking, guarded comments from the Fed, and concerns about a second wave of COVID-19.
- “We’re not even thinking about raising rates”: On Wednesday afternoon, the Fed concluded their two-day Federal Open Market Committee meeting. In their official statement, the Committee indicated that “There is great uncertainty about the future. At the Federal Reserve, we are strongly committed to using our tools to do whatever we can, and for as long as it takes.” As expected, the Fed held short-term interest rates steady at a range from 0 to 0.25%. Of note, in the accompanying economic projections, rates are now forecast to be held at those very low levels through at least year-end 2022. In response to a question at the press conference, Chairman Powell indicated the Fed is not thinking about raising interest rates. Instead, the Fed’s focus is on “providing support for the economy,” with Powell adding support will be needed for some time. For 2020, the Fed sees the U.S. economy contracting by 6.5%, but bouncing back to 5% real growth next year.
|Equities||Week (%)||YTD (%)||1-Year (%)||3-Year (%)||5-Year (%)||Div Yield (%)|
|Russell 1000 Value||(5.9)||(17.1)||7.8)||4.5||21.2||2.8|
|Russell 1000 Growth||(1.9)||4.3||19.2||59.3||94.8||1.02|
|Bloomberg/Barc US Aggregate||0.8||5.9||9.7||16.4||23.4||1.27|
|Bloomberg/Barc US High Yield||(0.6)||(3.3)||1.5||10.9||26.1||6.54|
|Bloomberg/Barc Muni Bond||0.4||1.8||4.4||12.4||21.4||1.54|
|Bloomberg/Barc Global Agg. Ex U.S.||1.2||1.8||3.7||9.7||17.6||0.81|
|Crude Oil (WTI) ($/bbl)||(2.9)||(40.5)||(31.8)||(20.7)||(40.2)||36.3|
|Natural Gas ($/mmbtu)||(0.5)||(17.2)||(24.4)||(40.3)||(35.8)||1.8|
|Currencies||1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
As of June 11, 2020 (close)
*Dividend Yield For MSCI EAFE and MSCI EM are from 5/29/2020.
Chart of the Week
The first chart above shows the price of the S&P 500 Index since 2007. The two charts at the bottom show daily data with respect to the percentage of NYSE stocks that are advancing, along with the percentage of daily advancing volume. Recent figures detail the fact that, from a statistical perspective, those two readings are both in the 99.9th percentile.
As noted (blue arrows) in the S&P 500 chart, similar readings have only occurred five other times over the past roughly 13 years. Looking at forward returns after such readings, while short-term results have historically been somewhat lackluster and mean reverting, longer term returns have tended to be above average.
While it remains to be seen if the same pattern unfolds over the coming months, it certainly is a positive sign that an increasing number of stocks are taking part in the rally. One of the recent concerns within the stock market has been that it was being largely supported by the performance of a few large cap (mostly technology) stocks.
Broadening participation, if it continues, would help to refute those concerns, and be indicative of a more healthy market environment. Of particular note would be an advance coming from more cyclical names, which are more heavily geared toward a robust economic recovery.
The table above shows the returns for three Russell indices that are comprised of U.S. companies of differing sizes. The Russell 1000 represents large cap stocks, with the two other indices representing mid- and small-sized companies. Over the past five years, the divergence in returns has been substantial, with large company stocks producing results that are far superior. Looking at the average annual returns over the past 25 years, however, the figures show far less disparity. Then too, the final column shows the performance figures for twenty years, excluding the past five which have been disproportionately beneficial to large company stocks.
Those 20-year returns show a far more balanced return profile across the market cap spectrum. Further, over very long time periods, market data actually shows that there has been a return premium to be earned down the market capitalization spectrum. While that has not been the case over the past few years, as market participation has broadened over the last two months, there has at least been a modest degree of outperformance from smaller companies.
As we have noted in the past, the recent outperformance of large cap stocks has resulted in valuation disparities where larger company stocks appear to be relatively expensive. While we do not know if small company stocks will continue to play catch up over near term, we do believe that will eventually take place. Again, two months does not equate to a trend, but for small cap equity investors it is a nice respite from the recent past.