The biggest 50-day rally for the S&P 500 on record met its first major test in months as coronavirus concerns, uncertainty around another COVID-19 relief bill, skepticism in the sustainability of this rally and a very cautious Federal Reserve economic outlook, led to the first three-day losing streak for the S&P 500 since March and the first weekly decline since mid-May.
Entering the week, markets were perhaps a bit extended as investor sentiment by most traditional metrics was the highest it had been since late-February and weekly US equity fund inflows were at their highest levels in nine weeks (per Bank of America). Sentiment has steadily become more risk-seeking and some clear areas of market speculation have emerged with stocks like Hertz and Chesapeake, both of which have filed, or are preparing for, bankruptcy, finishing Monday up 115% and 181%, respectively in a single market session! This risk-on sentiment propelled the S&P 500 briefly into positive territory for the year on Monday before the market ran out of steam and eventually moved sharply lower by almost 6% on Thursday.
Friday, investors aggressively bought the dip in early trading, and while the strength faded throughout the day and stocks briefly went negative around 2PM, we were encouraged that the S&P 500 was able to bounce off its intraday low and hold 3,000, as well as close back above its 200-day moving average around 3,013. The S&P 500 is now down about 0.1% in June and about 6.2% lower year-to-date.
Thursday’s Dip Provides Good Reminder
Ultimately, stocks probably needed to take a breather from an historic rebound to work out some of the speculative excess we have seen, as retail trading volume has surged exponentially in 2020 and has been further fueled by April’s record-smashing personal savings rate of 33% (previous high was 17.3% in May 1975 per FactSet). A more gradual pullback certainly would have been less alarming, but according to Bespoke Investment Group, since 1952, there have been 28 days (including Thursday) when the S&P 500 has fallen over 5%, and the index has responded with an average gain of nearly 19% over the next 12 months, with positive returns almost 83% of the time. We continue to see long-term upside for stocks, but Thursday was a good reminder for investors to remain disciplined and focused on managing risk as single session stock market moves up or down over 3% typically manifest themselves in clusters, so it would not surprise us to see more volatility next week.
Social unrest has dominated the last couple of weekends of media coverage, but we suspect that coronavirus coverage will increase this weekend as rising infections and hospitalizations in areas that had previously managed to avoid the brunt of coronavirus (i.e. AZ, AK, SC, FL, TX) have recently drawn a lot of scrutiny. We expect Monday’s market open to largely reflect the weekend’s coronavirus news flow and have circled Tuesday’s retail sales figure for May, as we look for signs of improvement after April’s 16.4% decline was the worst on record.
Ian Browning, CFA | Director, Investment Strategies & Shareholder
Peter E. Simmons, JD | President & CEO