Best Month in the S&P 500 Since 1987…Onward and Upward? Cautious, for Now.
“It Ain’t What You Don’t Know That Gets You into Trouble. It’s What You Know for Sure that Just Ain’t So.” – Mark Twain
April was quite a month for equity investors, no doubt about it. This was a “wow” in terms of a rebound from the swoon in stocks and related investor despair in the prior month. Specifically, the S&P 500 advanced 12.8% during this 30-day period of spring showers1. In fact, this marked the best month for the S&P 500 since 1987 and its 12th best monthly performance since 19282. Furthermore, investors fared well in almost all asset classes for the month.
To wit, small-cap stocks advanced even more than large-cap stocks as the Russell 2000 rose 13.7%3 and emerging market international stocks were up a solid 9.2%4. Even gold generated a 7.3% gain5. What a contrast to the results in the previous month when the S&P 500 fell 12.5%6 and virtually all major stock indices declined sharply. These whiplash results in the past two months may make one feel as though investor sentiment turned on a dime and shifted from fear of Armageddon in March, as we shut down the economy to address the coronavirus spread in the United States, to a “heaven-on-earth” attitude in April…on hopes that we can open the economy back up in the not too distant future and get on with our lives.
The rankings of these monthly returns confirm this was indeed whiplash of historic proportions as the March results rank in the worst percentile of negative monthly returns on record, and the April results are in the top percentile of positive monthly returns on record. Apparently fears of tragedy quickly shifted to fear of missing out, better known as FOMO. What is counter-intuitive to many is that the great April results and sharp rally from the March swoon came in the midst of unfavorable economic data releases. We learned at the end of April that Q1 2020 U.S. gross domestic product (GDP) fell at an annualized rate of 4.8%7, the biggest decline in this metric since the disastrous Q4 of 2008 when Lehman Brothers failed8. More sad economic news included:
- Personal consumption, the backbone of the U.S. economy, fell at a 7.6% clip, the steepest drop since Q2 1980.9
- The latest weekly report (week of April 27) on U.S. jobless claims reflects that 12.4% of the U.S. labor force is receiving unemployment benefits as of mid-April10, a record going back to the 1970s; over 26 million U.S. workers have filed first-time claims for jobless benefits since mid-March, and the unemployment rate has quickly hit double-digit levels, something we haven’t seen in a decade.11
- U.S. manufacturing in April, as captured in the Institute for Supply Management’s Purchasing Managers Index, fell at the sharpest rate since the last recession over 10 years ago, and some indices for manufacturing production hit their lowest levels since 1948.12
Expectations for the near-term economic trend are equally discouraging…IHS Markit, a well-known company that compiles economic data, projects GDP to decline by 37% at an annualized pace in the third quarter of 2020, which would represent the biggest decline for this bellwether measure since data began being collected in 194713. Our economists expect a similar rate of decline, and we look for earnings to drop roughly 30-40% this year14.
So, there you have it…the news is ugly, yet the market has rallied in April from the depths of despair in March. What gives and what’s our take on this? The bottom line is that our thoughts have not changed.
Our thesis has been and continues to be, hold your ground and upgrade your portfolio where possible. Importantly, we have trumpeted the message to most investors not to panic and sell equities in the negative moods illustrated in moments like March, but at the same time to avoid getting carried away and giving in to some emotional urge to aggressively “buy on the dips” in a risk-on period like April.
We are cautious on the near-term, or next three to six months, but optimistic on the longer-term, 12 to 15-month period. Regarding the short-term, our caution stems from the fact that we have had one of the sharpest and swiftest first phase recovery rallies ever over the last 25 days on record. Generally, we experience a pause and retrenchment from such short-term, overbought conditions. In addition, there is a huge execution risk as the Federal Reserve and the Treasury employ the stimulus to get us through the economic gap in the second and third quarters of the year and significant uncertainty in our ability to reopen the economy and attempt to minimize second wave impacts.
We believe we will be able to manage this adequately, but it’s just too early to be bold and aggressive in assuming we will do so as swiftly and effectively as the April activity in the market seems to imply. We suggest embracing caution and a willingness to follow the news flow on this front in the near-term. Hence the quote above of realizing that it’s not what you don’t know that ends up harming you in stock investing, it’s jumping to conclusions based on inadequate and opaque data that just ain’t so, that may cause pain and misfortune.
At the same time that we advise exercising this near-term caution, we are optimistic on the longer-term. We do think this is a transitory issue and that because of:
- The strength in the economy going into the coronavirus chapter
- The massive stimulus being employed to see us through to the other side
- The current apparent success of the social distancing measures the U.S. governors have championed in truly bending the curve and acting to slow new daily cases
- Significant evidence that China is successfully reopening via economic data trends and anecdotal evidence on the part of companies such as Starbucks, PPG, Federal Express, Caterpillar, Apple and others, who now say they are operating at much higher capacity levels versus only a month ago.
We appreciate that the stimulus provided by these governments is equivalent to 25% of GDP so far and that there’s likely more to come15. We are comforted at the size and resolve—these are cruise missile-sized fiscal and monetary stimuli, not slingshot-level measures, and a positive, unprecedented policy element that was missing in past recessions to heal the economy.
The Longer-Term View
In addition to the rationale presented above for why we are optimistic about the 12-15 month horizon for stocks, is the forward-looking nature of the market. We have stated consistently through this challenge that the market doesn’t stay focused on absolutes but keys in on and sniffs out inflection points from extreme, pessimistic levels and trades on trend in the data. Investors realize that the near-term data may be horrible and may be unlikely to continue to worsen in short order. This will likely keep a lid on things for a bit, as there is little good news to cheer near-term, but as soon as the data starts to get “less worse,” and negative economic data and negative earnings revisions peak and start getting “less bad,” the market should cheer. There will even be more cheering as data stabilizes from there and potentially begins to turn positive late in 2020. Because the United States is employing fiscal and health care tools to manage the crisis, we believe the less-worse data is not too far off, but we need to look for some evidence of it to confirm our longer-term positive view before counting our eggs, so to speak, by increasing equity exposure.
The charts below show how the market discounts, in advance, the trough in the recession and peak in the earnings decline. Hence our thinking that it would be imprudent and costly at this juncture for most investors to reduce equity positions given our base case view that the peak of the recession and the earnings decline should ensue within the next two quarters.
That said, if an investor does find in this moment of stress they are a bit more fearful than they once believed and are having trouble sleeping at night, perhaps they should fade this rally and lighten up a tad in equities. Similarly, for those getting in touch with their risk taking inner self and finding they are more opportunistic in orientation than they thought, we would not rigidly try to block their instincts to rebalance their portfolio by increasing their equity exposure…as long as they know, we believe the probability of the S&P 500 retrenching back toward the 2400 level before advancing to the 3500 level in the second half of 2021 is high.
The Short of It
In the short run, we think we are more likely to see a bumpy trading range between 2400 -3000 in the medium-term. This means, in our view, the risks lean to the downside at present if one is looking for instant gratification…something we Americans seem addicted to. Our thought is, don’t expect it…or at least don’t plan for it. The chart below shows that the final 25 days in April marked the swiftest and strongest first phase rally on the heels of a bear market level pullback on record. Note in the table and in the line graph that returns in the first 25-65 trading days after such a robust bounce are random and many times negative. On average, they are flat to slightly positive but very unpredictable in outcome. Looking out over longer 6-12 month periods, the data is far more positive and suggests that indeed the recovery momentum was a sign of longer-term health, despite the disappointing short-term activity.
This data is in line with our “hold your ground” view. Now we don’t subscribe to the market always repeating, but as Mark Twain also said, “History may not repeat itself, but it does rhyme.”
In terms of things we are watching to help judge how the we’re doing in reopening the economy and consumers’ ability and willingness to get after it, we’ll be monitoring some less than usual metrics such as:
- Open Table restaurant reservation trends
- TSA airport traveler checkpoint volumes
- Consumer comfort measures on reengagement in purchase and experience activity
- What the credit market is telling us
We tried to delineate clearly why we have maintained our “hold your ground and upgrade” view as to prudent strategy in this environment. It comes from our views on the short-term, cautious backdrop and the longer-term, positive slant. We believe it is the right side of valor to help our clients avoid whiplash. Now this doesn’t mean we are simply sitting completely still within the equity exposure we maintain. In our internal strategies, we have executed significant activity to sell some lower quality names in areas that may struggle as certain sectors of the economy strive to reopen. We used those proceeds to purchase securities with stronger balance sheets and in areas that can prosper more quickly as folks begin to go back to work and reengage in more normal activities. But on the overall asset allocation front, we continue to hold tight and exercise our mantra not to mistake activity with progress. In regard to making bold asset allocation shifts at this juncture, I’d like to quote Warren Buffet’s almost lifelong business partner at Berkshire Hathaway, Charlie Munger, who said at times of stress: “Sometimes the key to successful investing is being willing to sit on your a##.” We agree with you Charlie!
7Torry, H. (2020) ‘Virus Shrinks Economy by 4.8%’, The Wall Street Journal, 30 April, pgs. 1-2.
8Torry, H. (2020) ‘Virus Shrinks Economy by 4.8%’, The Wall Street Journal, 30 April, pgs. 1-2.
9Torry, H. (2020) ‘Virus Shrinks Economy by 4.8%’, The Wall Street Journal, 30 April, pgs. 1-2.
10Torry, H. (2020) ‘Virus Shrinks Economy by 4.8%’, The Wall Street Journal, 30 April, pgs. 1-2.
11Torry, H. (2020) ‘Virus Shrinks Economy by 4.8%’, The Wall Street Journal, 30 April, pgs. 1-2.
12Harrison, D. (2020) ‘ Lockdowns Take a Toll on Manufacturing’, The Wall Street Journal, 2 & 3 May, p. A2.
13Harrison, D. (2020) ‘ Lockdowns Take a Toll on Manufacturing’, The Wall Street Journal, 2 & 3 May, p. A2.
14Mariner Wealth Advisors’ Bill Greiner & Jeff Krumpelman
The S&P 500 Index is a market-value weighted index provided by Standard & Poor’s and is comprised of 500 companies chosen for market size and industry group representation.
The Russell 2000 index is an index measuring the performance of approximately 2,000 smallest-cap American companies in the Russell 3000 Index, which is made up of 3,000 of the largest U.S. stocks. It is a market-cap weighted index.
Institute for Supply Management’s Purchasing Managers Index (ISM Index) is a monthly composite index, released by the Institute for Supply Management, based on surveys of 300 purchasing managers throughout the United States in 20 industries in the manufacturing area.
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