Well it appears I have been proven wrong.
The stock market recovery from the 34% decline in March continued almost unabated in May. The S&P 500 closed out May down 10.1% from the high on February 19, 2020 and down 5.8% YTD. As previously reported, we had lowered equity exposure in portfolios during early March, when the Covid-19 impact was in full swing. We have been slowly adding back equity exposure since mid-April, but our approach was cautious as our analysis anticipated the relief rally from the March low stalling out. We felt the stock market was completely pricing in a “V” shaped recovery from the pandemic, but that the actual recovery would likely be slower and longer. The stock market has proven me wrong, at least so far. In retrospect, we should have been adding back to equities more aggressively. Hindsight is always 20/20, but this was a missed opportunity.
Going forward, there still remains opportunities and risks, for both the stock market and the economy.
For the market, the bulk of the recovery has been driven by a relatively small number of stocks. Primarily, large technology companies like Amazon, Microsoft and Google. For example, as of the end of May, only 27.6% of all the stocks traded on the NY stock exchange (2,800 companies) are trading at or above their 200 day moving average, which is a good long-term trend measure. That means that some 2,000 companies still have room to run, if stocks continue their upward move. Herein lies the opportunity. On the worrisome side for stocks, typically it is cyclical companies (think banks and industrials) that lead the market higher when stocks rebound from a bear market and recession—but not this time. While these 2 sectors have shown signs of life in the last week or so, they still are lagging far behind technology. I will watch these closely as an indication of how the economic recovery is progressing.
On the economic side, recent economic reports appear to indicate that the worst of the pandemic-related economic shock is behind us. However ‘not worse’ economic data is a long way from “good” economic data. It’s telling that the nonpartisan Congressional Budget Office (CBO), often more optimistic than consensus, recently released new estimates showing that US GDP would not recover its prior peak until 3Q 2022. The opportunity is a health care breakthrough that would prompt faster re-openings, or more rapid and confident reengagement by consumers and businesses could bolster the economic outlook. Conversely, a second-wave, either near-term due to the re-opening of the economy, or during the fall when flu season returns would be a significant setback The risks to growth remain skewed to the downside in our view.
Below is an interesting chart looking at the 3 key areas – Health, Economy, Markets – that highlights some of the key topics in each area that we are watching.
As we move into June, we will be continuing to selectively add to equity exposure, looking for opportunities with room for more upside.
Update on our office: We are re-opening our office on June 2rd, using rotating shifts and appropriate social distancing measures. Thank you for your patience with us while we were all working from home.
I hope this report is helpful to you. Let us know if you have any questions.
June Calendar of Events (comments and additions for future months are always welcome)
- June is LGBT Pride Month. Let’s all work towards acceptance and inclusion of people regardless of their sexual orientation.
June 14th Flag Day
June 20th Summer begins – it’s certainly going to be a different summer. Enjoy it safely
June 21st Father’s Day – wishing all father’s, grandfathers, and great grandfathers a wonderful day.
Sources: Blackstone, Schwab, Yahoo Finance
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