Uncategorized, Weekly Update

The Recovery Trade Comes Undone

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Published June 12, 2020


Maybe the bear market is, or will be, alive and well. This week’s market action reminded investors that we are in an economic recession, and that it has just begun. There are still 20 million people, at least, unemployed, and likely will be half that many unemployed for months to come. And the government support checks might be drying up in a few weeks. The torrid run in the previously lagging groups, like financials, energy, and small-caps gave up almost all of their two week party (all of June’s gains) in a mere two days. Investors were reminded that in a dicey market environment it pays to be careful.

Little hard news occurred to pull the plug on the recovery rally. Fed Chair Powell noted that economic conditions were soft and would likely remain so for quite some time, leading to near-zero interest rates for perhaps a couple of years(!). This seemed to upset the v-shaped recovery narrative that the market had come to embrace.

Let’s take a look at where the market gave, then took away, some heady moves.

Financials give up their early June rally as interest rates rise then fall

Financials give up their early June rally

Cyclical Materials stocks drop back

Cyclical Materials stocks drop back

Looking at the chart above, the recent rally lasted for about three weeks, from mid-May to early June. The past couple of days have given half or more of that back. Is this just a pause to refresh before the rally resumes? Or is the bear market showing its claws again, preparing to send stocks back to the March-April depths? At a minimum, it’s fair to say that the recent rally in the lagging sectors like those above went too far too fast. This week’s pullback probably returns these sectors to a level more consistent with the economic grind we have ahead as lockdowns are lifted, coronavirus cases rise, and business/government leaders wrestle with what a world operating at middling capacity looks like.

Market Update

Stocks suffered this week as the recent rally hit a wall. Rather than an ongoing retreat, however, most of the week’s damage occurred in a one-day spasm of selling. The week began in positive fashion with a +1% gain Monday pushing the S&P 500 in the green for the year, an astonishing achievement given the market’s swan dive just weeks ago. Stocks continued celebrating the surprisingly good jobs report from the prior Friday. A pause Tuesday saw a shift in leadership back to tech/consumer stocks and away from the recent strength in beaten-down transport, energy, and financial shares. That trend continued Wednesday with the Nasdaq closing higher, crossing the 10,000 level for the first time ever, while the other market indexes dropped. The key news of the day was the Federal Reserve statement affirming market support while noting that interest rates are likely to remain at extremely low levels for two more years. In perhaps a delayed reaction to that statement, and attendant cautious outlook from the central bank, investors dumped stocks in droves Thursday. The S&P 500 tumbled -6% in its worst day since the March selloff. Bank stocks, in particular, were hammered as the long-term prognosis for ultra-low interest rates hurts their profits. Investors noted the rise in coronavirus cases as states unwind lockdowns. However, the rise in cases has been occurring for days. Perhaps stocks just needed a break from their non-stop rise over the past couple of weeks. Whatever the cause, buyers returned Friday to allow the S&P 500 (+1%) to hold the 3000 level and its closely-watched 200-day moving average.

Stocks gave back a chunk of recent gains this week with the S&P 500 (SPY) sliding -4.74%. The Nasdaq 100 (QQQ) kept its losses relatively moderate at -1.59%. Small-cap stocks (IWM), the recent leadership group, fared the worst, slumping -7.87%.

Warm wishes and until next week.