Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Record fiscal and monetary stimulus (estimated ~30% of US GDP!), along with a stall in the number of COVID-19 hospitalizations and new cases, has led to the sharpest 15 day rally for the S&P 500 since the 1930s (+27%). While the market bounce has been impressive and we are hopeful that the lows are in, there is plenty of uncertainty and market-moving information in the coming days and weeks ahead (volatility and 5-10% moves are likely to be the norm). Just as the 35% collapse in 26 days was “too far, too fast,” the rally has been as well.
Investor focus is now shifting toward restarting the economy, in which President Trump is set to release guidelines on relaxing social distancing today. Challenges around testing, therapeutics, and contact tracing remain. Preliminary NYC hydroxychloroquine results will be revealed on Monday (4/20) and is likely the biggest item for the short term, as positive results can improve the recovery trajectory, whereas negative results will be a setback to the timeline. Raymond James analyst Steven Seedhouse has been optimistic on the results for some time but lowered his expectations to a “coin flip” this week following disappointing China test results. Additionally, there still remains limited progress on widespread testing (with capacity issues), as well as contact tracing (although this could ramp up rapidly if the American public buys in). There are also risks to reopening the economy too quickly, i.e. potential for a resurgence of the virus. We will be watching countries ahead of us for clues on the virus spread, as well as their citizens’ confidence/willingness to get back to normalcy. Our base case outlook is for a restart of the US economy in phases around the Memorial Day to July 4th timeframe.
With so much uncertainty remaining, we would not be surprised to at least see the market “cool off” from current levels (18x P/E vs 13.8x at the low). In assessing previous recessionary bear markets, it would be highly unusual for the S&P 500 to just glide back to the previous highs. On the other hand, it is very common for exhaustive selloffs to be followed by sharp bounces, and then a “grind it out” pattern with potential “retests” as more information surrounding the issues of the day are gained (and the market has time to digest its sharp pullback). An actual “retest” of the March 23rd lows may not have to happen, but a ~10% pullback to the 2400-2500 range could occur very easily. Even if the lows are in, long term investors have not missed the long term opportunity, as we would only be 17 days (and up 25%) into the next bull market. Bull markets have historically lasted 1233 days with gains of 155% on average. In sum, we would use pullbacks as opportunities to accumulate stocks for the long term.
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