Our last Market Update was on 5/22, three weeks ago. Since then, much has transpired. From 5/21 through 6/8, markets climbed strongly, rising 9.6% considering just the S&P 500. Since 6/8, markets fell substantially, with the S&P 500 falling just over 7% through yesterday. The net stock gain over the last three weeks was about plus 1.8%, which would otherwise be a good result. But with the market’s tumble yesterday, its worst day since mid-March, volatility has suddenly returned in a substantial way. This occurred the day after the Fed issued a somewhat cautious comment and after a few days of apparently deteriorating health data for some of the earliest states to begin reopening. On the other hand, there has been some recent good news on development of treatments and vaccines for coronavirus. As to the economy, last week, the jobs report brought the largest surprise in economic reporting on record: an addition of about 2.5 million jobs versus an expectation of a loss of 7.5 million. And all are aware of the historic outbreak of social unrest including large and widespread peaceful protests and often, rioting and extensive looting. All this occurred within just three weeks – it’s enough to make one’s head spin. What should one make of it?
On 5/22, we wrote that in aggregate, stock markets were extremely overvalued. We also wrote then of the extreme divergence between “value” and “growth” stocks, which is to say, between the cheapest and the most expensive stocks. As of 5/21, the gap in year-to-date performance between the Russell 3000 Growth and Value indexes was shockingly wide, with the popular, expensive growth stocks outperforming the value index by nearly 22 percentage points! 5/21 through 6/8 brought a substantial reversal of that gap with the Value Index outperforming the Growth Index by nearly 8 percentage points in just two and a half weeks. Then from 6/11 through yesterday, that turned around again with Growth outperforming Value by 5.5 percentage points.
Similarly, small stocks have lagged large stocks this year, but less spectacularly than the value-growth gap. Small US stocks lagged large US stocks by about 11 percentage points through 5/21, then lead by 4.4 percentage points through 6/8, and since then, have lagged large stocks by 4.6 percentage points. For perspective, these are the equivalent of multi-year divergences playing out in a matter of weeks or even a few days.
Several weeks ago, we also wrote of unprecedented moves in the price of crude oil. Spot crude recovered from prices then in the teens to nearly $34/bbl by 5/21. From that point through Wednesday, it moved up an additional 15% before collapsing by nearly 9% yesterday. No matter how dramatic, these market moves are of less long-run consequence than the economic data and for now that is heavily dependent on progress in the health arena. We closely monitor the COVID-19 data daily, and on a nationwide basis, we’ve witnessed encouraging trends in numbers of tests administered, in percentages of positives for those tested, in numbers of new cases, and in death rates. But the experience varies significantly by state, and in the last few days, rising cases (more than explained by increased testing) and rising hospitalizations in certain states have caused some alarm, particularly in Texas, Arizona, Utah, and the Carolinas. Additionally, Dr. Birx reported that looting has damaged or destroyed 70 urban testing sites, mostly in CVS and other drugstore locations, raising additional concerns. Lastly, as many of the current hotspots are in the South, that may undermine the hope some hold that this virus (officially, SARS CoV-2) may exhibit a seasonal tendency to fade in Summer as did SARS some 17 years ago (which was officially, SARS CoV-1, but in fairness, SARS didn’t stop spreading in the Northern Hemisphere until mid-June). None of these alone constitute a reversal in the trend toward improvement versus the virus, but collectively they have raised enough concerns to produce at least a correction in an overextended market that had lately begun to show signs of speculative excess.
Had markets gotten ahead of the fundamentals? No, stocks don’t track or follow the fundamentals, stocks anticipate fundamentals. The sharp recovery in markets represented the markets’ expectation of an opening of the economy and a recovery in earnings. An interruption in the stock recovery represents a reassessment of the time frame for economic recovery, not the condition of current fundamentals.
Like most corrections, this one could turn out to be nothing more than a blip. Whether it does or not will depend largely on the health data, so we’ll have to see. But longer-term, this is a good time to remind ourselves that regardless of whether recent days’ health data represents a false alarm or a set-back, in the end, all pandemics throughout all history have been temporary. The world will win the war against this disease, setbacks will be passing, and there will be a light at the end of the tunnel to anticipate.