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

Short-Term Summary

The S&P 500 is approaching the two-month anniversary of its low on 3/23 and is up an impressive 31% since then. This 40-day rate of change is actually the second highest since 1940, with the only better 40-day rally coming off the lows in 2009 (+34%). In looking at the very small sample size of 20+% returns in 40 days (only 5 prior times since 1940), they have all occurred out of bear markets and have (importantly) been followed by above average returns. For example, the average return over the next 40 days and 250 days was 4.5% and 21.6% respectively. This compares favorably to all normal 40 day and 250 day periods with average returns of 1.2% and 7.6% respectively. However, we do not expect it to be a glide path higher, as 5-7% pullbacks along the way are very normal (particularly over the next couple months).

In looking to the 2009 recovery as a guide, there are some interesting comparisons to the recent market activity. For example, the S&P 500 rose 36% and the forward P/E expanded 61% by the time forward earnings estimates bottomed in late April 2009. As earnings began to improve, valuation stalled out. Similarly, current forward earnings estimates have flattened out (potentially bottoming) and the S&P 500 forward P/E has risen by 60%. We view the current S&P 500 forward P/E of 21.3x as lofty, and as such we believe earnings improvement will need to be the primary driver of forward returns from here- making the trajectory of the recovery paramount. This potential earnings bottom is also occurring with the S&P 500 approaching technical resistance at its 200 DMA. In the 2009 period, this was also the case and the index grinded sideways for a couple of months with two 5-7% pullbacks. With so much uncertainty surrounding the economic restart, path of consumer behavior, spread of the virus, vaccines/treatments, testing, along with US/China rhetoric ramping back up, we expect volatility to occur.

Technically, the S&P 500 has shaken off a number of pullback setups in recent weeks, producing a wide, but well-defined price formation between roughly the 200 DMA (2999) and 50 DMA (2722). In the short term, we will be watching for a breakout in either direction but believe the S&P 500 is likely to trade within a grinding range of 3130-2630 over the coming weeks to months. Unless something changes, deep pullbacks are unlikely in our view. However, decent pullbacks are expected, as a normal move to the 50 DMA reflects a 8% pullback. We would use such periods as opportunities to buy favored sectors and stocks for the next bull market. Moreover, there have been brief moments of broadening participation (into the deep cyclical areas, small caps, international), but we are still waiting for further evidence of sustained momentum there. For now, continue to stick with what is working- US large cap (growth bias), technology, health Care, communication services, and select others.

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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.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.

The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.

MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.

MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy, and banks.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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