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Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.

Short-Term Summary

As the S&P 500 has paused in recent weeks (following a 31% move higher in 26 days), participation beneath the surface has gotten increasingly narrow. Once the index was unable to break above its recent highs on Tuesday, this less supportive technical backdrop contributed to a 6% selloff toward the lows of its recent range (from where the S&P 500 was able to rebound today). We expect volatility to continue (given the high degree of uncertainty and economic damage). In the short term, the first level of technical support to monitor is 2736, followed by ~2630 if unable to hold. In fact, the 2630 level represents a 10% pullback from the recent peak on 4/29, which is very normal historically as equities attempt to rebuild upside momentum out of recessionary bear markets (historical examples shown on page 5). Remember that bear markets are typically very fast and violent, whereas bull markets last for years. Thus, we would use pullbacks as opportunities to accumulate favored stocks and sectors for the long term.

Actions appropriately grabbing investor attention this week included Dr. Fauci concerns over restarting too fast (risk of resurgence), Fed President Powell highlighting downside risks to the economy, and US/China rhetoric ramping up. As many areas around the country start to reopen, the virus spread will be important to monitor for investors. Mitigation efforts currently have new cases, hospitalizations, and the % of positive tests all trending downward. We would obviously like to see these continue to trend in the right direction, and will also be monitoring economic data for clues on the potential trajectory of the economic recovery. Early indications suggest improvements to consumer activity are likely to be gradual and mixed (i.e. e-commerce and staples products recovering faster).

Our favored sectors remain technology, health care, and communication services- many of which had gotten extended in the short term and needed a “cooling off” period. Contributing to their strength has been relatively strong fundamentals in the current environment. For example, these three sectors grew earnings by 4.9% in Q1 on average, whereas the S&P 500 saw a -13.5% earnings contraction. Technology and Health Care, in particular, are seeing the best fundamental momentum- only expecting a -11.5% earnings contraction on average in Q2 (expected to be the economic trough of COVID-19 impact) vs the S&P 500 at -41.8%. Valuation on a P/E to Growth basis is also fairly attractive with Tech and Health Care at just 1.35x and 1.15x respectively (based on two-year estimated earnings growth).

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Index Definitions

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

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