As global equity markets continue their steady climb in the face of this unfathomable health and economic crisis, there is no wonder many investors are surprised. Although much of the initial rebound off the March 23rd low can be attributed to optimism surrounding COVID-19 containment efforts as well as the full and partial reopening of major economies including all fifty U.S. states, we believe that there has been other major factors sustaining and improving stock market conditions over the past few months.
When comparing the performance of the eleven S&P 500 sectors, it is glaring that the rebound has not been broad-based. In fact, much of the rebound can be attributed to the performance of the healthcare and technology sectors, both of which are up double digit percentage points over the previous twelve months. Furthermore, tech giants such as Amazon.com, Facebook and Netflix have helped buoy the consumer discretionary and communications services sectors. Although these few names are not the only stocks experiencing new highs, it is important to note that their market caps are some of the largest in the S&P 500 Index, and for better or for worse, highlighting their importance. However, as of late, optimism around reopening and a relatively quick recovery in oil prices has recently shown signs of life in lagging sectors.
Another major factor to consider when attempting to square the stock market rebound to deteriorating economic conditions is the fact that in order for a stock to be added to the S&P 500 Index, it must be a large corporation that serves many individuals and business. However extremely unfortunate, the pandemic has forced many small businesses to close, deeming their operations as non-essential, whereas companies such as Walmart, Costco, Target and Home Depot were able to keep their doors open. As the SAGE Investment Committee reflects on the aftermath of the March 2020 selloff, we believe that the stock market had significantly over estimated the decline of corporate profits, briefly disregarding the size, strength and resilience of our publicly traded companies.
Besides the performance of individual sectors and stocks, we believe that the Federal Reserve’s unprecedented accommodation is another major factor sustaining and improving the U.S. equity market. Unlike the quantitative easing programs in response to the 2008 financial crisis, where the Federal Reserve funded excess reserves of our major financial institutions, the massive amounts of money that the Federal Reserve is currently creating is being pumped directly into the economy. We are witnessing through a significant increase in commercial and industrial loans, much of which is being facilitated by the Paycheck Protection Program. Understanding that the purpose of PPP is to maintain payroll costs and avoid a complete economic meltdown, we believe that the massive increase in the money supply is another major factor fueling equity markets
Although we remain confident in corporate America’s ability to weather this storm and encouraged by the Federal Reserve’s willingness to provide liquidity to the economy, we are closely watching consumer behavior during this phased reopening process to gauge the speed and strength of the economic recovery. For this reason, we are content maintaining a larger than usual allocation to risk control assets, and we are confident that our longstanding preference for U.S. growth oriented stocks will continue to enable portfolios to meaningfully participate in rallies during this period of heightened volatility.
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SAGE Investment Committee
Any opinions are those of the SAGE Investment Committee and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. 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. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Expressions of opinion are as of this date and are subject to change without notice.
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