Similarly to last week, investors had to weigh progress fighting COVID-19 and what that means for the future against the economic toll the virus and policies designed to slow it are having on the economy. The growth in the number of cases continues to slow, and some European economies and U.S. states are planning to reopen certain business in future weeks.
Key Points for the Week
- Global economic news showed weak spending as consumers in China and the U.S. both reduced purchases.
- The rate of daily new COVID-19 cases has slowed in the U.S. and overseas as social distancing continues to slow the spread of the virus.
- The S&P 500 rose 3.1% as investors emphasized optimism about fighting COVID-19 and news some states and countries will allow some businesses to reopen.
Economic data suggests it will be a rough week. More than 5.3 million people filed a claim for initial unemployment last week and retail sales shrank sharply in the U.S. and China. As shown in the accompanying chart, U.S. consumers reduced purchases by 8.7% and Chinese consumers slashed expenditures by 16%. The weak consumer spending contributed to Chinese GDP dropping 6.8%.
The S&P 500 gained 3.1% last week, and the MSCI ACWI added 2.2% onto its double-digit gains. The Bloomberg BarCap Aggregate Bond Index gained 0.7%. The S&P 500 has now gained 28.7% from the low reached on March 23. Even with the rally, markets remained volatile. The S&P 500 has moved by more than 1% in 35 of the last 40 days.
The success of any relaxation to social distancing rules is an indicator we will be watching in coming weeks. As the retail sales report and jobs data shows, the necessary steps to control the spread of COVID-19 are exacting a heavy price. The goal will be for business activity to grow in a way that allows daily new cases to continue to steadily decline.
Risk and Return
Global stocks have been on a roll. The MSCI ACWI index, which includes stocks from developed and emerging markets, has rallied 25.3% since the low on March 23. The S&P 500 index of larger U.S. companies has done even better, soaring 28.7% from the low.
The rally reflects welcome news. The curve is being flattened. Expectations for when some businesses might reopen have gradually improved. The market also benefited from a report that a pharmaceutical drug has had some success in moving severe cases out of hospitals, although some patients participating in the drug trial were not able to recover. Whether it is this treatment or another one, efforts to treat the virus are garnering wide attention.
When markets gain so much, long-term investors should balance out the positive news with the fundamentals. Near-term, the economic toll looks to be quite large. Retail sales in the U.S. dipped 8.7% over the last month. Grocery stores increased sales more than 25%, but autos and parts, furniture and electronics, and food service and bars were all down more than 20%. Clothing sales dropped more than 50%. China, which started recovering from the virus earlier than the U.S., experienced a 16% decline in retail sales last month.
The businesses that open first will collectively seek to stem some of those losses. More retail stores are planning to offer curbside pickup to minimize risks of the disease spreading while providing some support to their revenue and helping to bring employees back to work. Markets have welcomed this news, too.
Yet, market direction has not been the best indicator this year. After all, the S&P 500 hit a new high on Feb. 19 on optimism a decline in new cases would continue. But risks were higher than the market expected. In light of the continued uncertainty, we want to counterbalance the sharp increase by sharing our top five near-term risks to the stock market rally.
- Pandemic resurgence: Social distancing has worked to constrain the virus. Any increase in cases that accompanies a reduction in some social distancing rules poses a risk to stocks.
- No medical breakthrough: News of improved treatments is important as they will reduce the risks associated with getting the virus. Improved treatments and a vaccine are expected in the future, but they are not guaranteed.
- Anxious consumers: Data from China and South Korea show their citizens are returning to work and then returning home. Businesses can reopen, but no one can make consumers venture out.
- Particular industries: Some areas will be hard to reopen without a major breakthrough. For example, companies focused on recreation, group activities, and travel are going to continue to weigh on the market and employment.
- Another challenge: Just because we are in the throes of the coronavirus doesn’t mean a second challenge can’t arise. Another terror attack or data breach will likely be more potent in this environment than on its own.
The goal is to remain balanced. It is impossible to be unemotional about financial decisions for the simple reason that all decisions have an emotional component. Whether balancing fear and greed or the more nuanced alternative, risk and return, don’t forget both parts are always with us. If you have made some rash decisions, like the man in the cartoon, don’t lose heart or dig in your heels waiting for the market to swing back down. Work with your advisor to figure out a path toward a new plan that you are comfortable with regardless of the market’s direction.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds
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