After an impressive 4.6% surge to kick off the first week of June, the S&P 500 is now down only 1% on the year and is just around 6% below its all-time high. In our view, this is shocking considering the dark state of affairs in nominal employment, economic growth, sales growth, and earnings growth. It is clear that the market has cast aside the Covid-19 crisis as a momentary disruption to economic activity. One that has been successfully patched by massive levels of fiscal and monetary stimulus. There is plenty of merit to this theory. Given that many states are now operating close to full capacity, there are few indications of a widespread resurgence in the virus, and employment data has bounced much quicker than anticipated. We must remain vigilant, however, as we respect this momentum. Great unknowns still lie ahead.
The market rally off of the March 23rd low has been among if not the most impressive of all time. What started as a flow into high growth technology leveraged companies least affected by the virus, has now broadened out to nearly every corner of the market. In fact, 46% of S&P 500 companies are trading at a 65 day high. This kind of breadth has historically been a good omen for things to come. Based on historical data, when greater than 40% of stocks are trading at a 65 day high, the market has returned around 11% over the next 250 days.
Again this week, we saw some of the hardest-hit areas of the March sell-off outperform. In particular, bank stocks. This comes on the heels of yield curve steepening over the last few weeks, likely signaling a more positive outlook on future economic conditions. This improving outlook was also reflected in Friday's impressive jobs numbers. Economists were expecting an additional 8 million job losses but instead were greeted with the single largest number of monthly job gains in history at 2.5 million. There are some concerns about the accuracy of the survey, but there is no denying that things are going much better than most feared. This revelation has brought fresh life to market rally that had been getting a little long in the teeth.
Still, the unemployment rate sits at 13%, and the number of permanent job losses stands at over 1 million. We are in the early innings of assessing the damage from the shutdown, and we certainly aren't out of the woods yet on the virus. We also have a monumental election in just five months, and China is getting more aggressive. It's encouraging that things are moving in the right direction, but there are still more risks out there than what the market seems to be pricing in. In addition, we're getting closer to what could be characterized as a melt-up. As history shows, you seldom have a meltdown without a melt-up first. We've turned our eye towards finding value opportunities while working to understand and position for the risks ahead.
Preston May, CBE®
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S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.