Published May 1, 2020
If I had told you 12 months ago that:
- Unemployment will jump from 4% to 15%
- Fed interest rates will fall from 2.5% to 0%
- Stock volatility will triple
- Oil will crash down 70%
- ….and yet, stocks will be flat over the year.
Would you have believed me?
The answer is ‘no’. Just like the answer would be ‘no’ were someone to say, at the end of March, with stocks just having suffered their worst month in years, that all of that March loss would be recovered over the ensuing four weeks. And it would do so while 30 Million people file for unemployment during that month.
How does this stock market make any sense at all?!
The stock market has an enormous number of inputs. It has investors thinking short, medium, and/or long-term. There are investors who are looking to buy stocks on the cheap. Investors looking to buy stocks that already have momentum. Investors looking to buy stocks that simply move a certain way, with no concern for their financial performance. It’s a great hodgepodge of inputs that makes a market. No one knows what will happen from one day to the next; which of those various inputs will be stronger or weaker than the day before.
The stock market just closed its best month in decades while the economy logged one of its worst months ever. This only makes sense in the broader context where the stock market is looking toward the last four months of the year and believing, right now anyway, that the economy will be recovering by then. Optimistic investors see a path forward to that recovery, juiced by a Federal Reserve that has told investors very clearly that it will simply not let things get too bad. Here’s what the current economic projections look like:
The market already expects a completely dismal second quarter of the year (April-June). But that is followed by a rebound in the July-December period. That’s the bullish case for stock. A bearish investor will look at this and see there are plenty of downside possibilities: a second wave of virus, a slower economic recovery, or some other unforeseen issue.
The stock market clears the inputs of a great diversity of opinions. It is full of shifting sands, especially now, in this environment full of fog. With all of this uncertainty, we think it is the perfect time to take a very flexible investment approach. Our TimingCube model has substantially outperformed during these types of uncertain markets.
Stocks continued riding optimism over selective reopening of the nation’s economy to a +1.5% gain Monday. Those gains continued in Tuesday’s session, at least for small-cap stocks, which added +1.3% despite a further decline in oil prices, now sitting at $12/barrel for U.S. crude, down 80% so far this year. Earnings from the largest tech/consumer companies all hit this week. The first of those came after Tuesday’s close with Alphabet (GOOG) posting reults good enough to boost the stock by +9% Wednesday. That news, plus positive developments in Gilead’s coronavirus therapy drug and soothing words out of the Fed propeled stocks higher by +2.7% in a broad-based rally. Small-cap stocks continued their recent outperformance with a +5% rise on the day. A reality check hit Thursday with weekly new jobless claims again at record levels while consumer spending fell in March by the largest amount on record. The S&P 500 slipped -0.9%. Well-received earnings from Facebook (FB) and Microsoft (MSFT) helped limit the downside for the Nasdaq. However, Amazon’s (AMZN) earnings Thursday night led to a sharp -7% selloff in that market leader Friday. The company delivered huge revenues but lagging profits as the costs of operating in the pandemic era drove costs higher. With the market’s tech/consumer leadership under pressure, the S&P tumbled -2.8%. Reports out of energy heavyweights Exxon (XOM) and Chevron (CVX) failed to support the recent advance in energy share prices, providing another negative in Friday’s trading.
In a tale of two halves, this week’s major rally Monday through Wednesday hit the skids Thursday and Friday to leave the S&P 500 (SPY) with a flat -0.06% weekly performance. The Friday tumble in Amazon shares pulled the Nasdaq 100 (QQQ) to a weekly loss of -0.51%. Small-cap stocks (IWM) managed to hang on to a sliver of their massive early-week gain, closing +2.23% higher after being ahead by +10%.
Warm wishes and until next week.