Last Week’s Markets in Review: Focus on the Fed
Stocks rebounded from Thursday’s sharp selloff, but it wouldn’t be enough to offset a challenging week for the stock market. In the U.S., the S&P 500 Index fell to a level of 3,041, representing a decrease of 4.73%, while the Russell Midcap Index moved 6.32% lower last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -7.89% over the week. On the international equities front, developed and emerging markets also declined, returning -4.21% and -1.52%, respectively. Finally, the yield on the 10-year U.S. Treasury moved lower, finishing the week at 0.71%.
On the back of the S&P 500 index marking its third consecutive weekly gain of more than 3%, the first time this has happened since 1982, markets started last week on a high note. The index even closed in positive territory for the year on Monday, something only the technology-laden NASDAQ has been able to accomplish up until this point. As a result, valuations appeared to be stretched based on a number of different measures and data points, and as it turns out, the rally had to slow eventually.
Markets opened on Thursday with a hauntingly familiar tone that we’ve seen several times earlier this year. Major indexes fell over 4% while gold and treasuries rallied. So why the stark contrast to recent optimistic trading? The sharp downturn at the open is likely due to investors questioning the shape of the COVID-19 economic recovery. Much of the recent rally was due to a belief that this particular economic recovery could potentially be “V-shaped.” Markets were on a euphoric tear after the monthly jobs report showed the U.S. economy unexpectedly added 2.5 million jobs in May, rebounding from April’s historic 20.6 million jobs decline and significantly beating expectations for a 7.5 million drop. Cyclical, smaller-cap companies and COVID-19 sensitive stocks rallied. However, based on comments from the Federal Reserve on Wednesday, and data regarding virus cases, some investors may now believe the economic recovery will be more “U-shaped.”
Essentially, the Fed didn’t do or say anything unexpected. Benchmark interest rates were unchanged, and they indicated that they would continue purchasing bonds, targeting $80 billion a month in U.S. Treasuries and $40 billion in mortgage-backed securities. Below is the updated “dot plot” showing policymakers expecting the Fed Funds rate to remain near zero until at least 2022, which is somewhat consistent with their earlier messaging of their intent to keep rates at, or near, zero for the foreseeable future. It is worth noting that this is the first “dot plot” since December 2019. No forecasts were released following the Federal Reserve’s “emergency” meeting in March.
On the economic front, the Fed sees GDP falling 6.5% in 2020 but recovering to a 5% annualized gain in 2021 followed by a 3.5% increase in 2022. So perhaps the support investors were looking for to solidify beliefs of a “V-shaped” recovery fell flat with this messaging from the Federal Reserve. Instead, it is clear the Fed believes the economic fallout from the virus will be felt for quite some time and we will continue to operate with a high level of uncertainty.
We continue to contend that a more “Swoosh-shaped” recovery over time is likely. Regardless, Thursday should remind us that the days of heightened volatility, akin to what we have seen thus far in 2020, are not behind us. In fact, through the first 100 trading days of 2020, there have been 53 “up days” and 47 “down days” with 43% of these days involving daily moves of 1.5% or more. This type of whipsaw volatility can serve as a helpful reminder to investors of the importance of time in the market and the dangers of trying to time the market when navigating these types of volatile markets. Trying to successfully time when to exit and then re-enter the market is often an exercise in futility and could result in missing out on some of the best “up days” that a market cycle may have to offer. As a result, incorporating some elements of downside protection into portfolio strategies while remaining selectively invested in the market may be worthy of consideration.
As always, we encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within an appropriately diversified framework that is consistent with their objectives, time-frame, and tolerance for risk. We recognize that these are very troubling and uncertain times and we want you to know that we are always here for you to help in any way that we can. Please stay safe and stay well.
Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 6/12/20. Rates and Economic Calendar Data from Bloomberg as of 6/12/20. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index, U.S. Large Cap defined by the S&P 500. Sector performance is measured using GICS methodology.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against loss.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 05/24/19. Rates and Economic Calendar Data from Bloomberg as of 05/24/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.