Growth is on the Horizon
The S&P 500 Index has rebounded 35% from the low on March 23 and is now only down 6% year-to-date. The rally was slow and deliberate as the headlines shifted from a virus-induced economic lockdown to a gradual re-opening. The economic re-start will revitalize small and large business activity and inspire consumers to emerge from their shelter-in-place. The support of the Federal Government’s CARES Act and the Federal Reserve’s active management of the low interest rate and liquidity environment will dramatically help the recovery. Unless the virus infection curve rises again, the second quarter GDP will mark the trough of U.S. economic activity so future quarters should demonstrate accelerating economic growth. Optimism is supporting higher valuations with development news of many potential vaccines and the declining virus infection curve. The U.S. population is adapting to the new virus-preventative measures with new policies and procedures which will balance safety and growth for the future.
Several market technicians and strategists are warning that the leadership in this market has been mostly among the large cap technology companies. The five largest companies in S&P 500 Index (Microsoft, Apple Google, Amazon and Facebook) represent 21% of the weighting in the index. These strong growth companies continue to innovate and focus their digital strategies on cloud storage, social media, digital shopping, enhanced intelligence and virtual reality. The sector performance leadership has been remarkably narrow with information technology up 17%, healthcare up 10% and consumer discretionary up 8% while the remaining sectors are negative. The energy, financial and basic material sectors are down the most while the small cap index is down 16% and the mid-cap index is down 14% year-to-date. There should be a broadening market rally that will fuel these sectors to catch up over the summer months.
The international markets are also experiencing great volatility and some optimism recently. The European Union is trying to negotiate a stimulus package that relies on the more productive northern countries to provide debt relief and stimulus to the southern countries. The EU is expected to have 8-12% economic contraction this year and requires government intervention, but skeptical resistance by northern countries will prove hard to overcome. Russian GDP, with its heavy dependence on oil prices, is contracting dramatically which provides less social and political stability. China remains in political and economic disfavor after pandemic mismanagement and recent actions in Hong Kong. We should expect China’s government to be the political punching bag in the U.S. elections in November which will deter acceleration in trade. Due to these uncertainties we remain underweighted in all international markets.
Stay well!
