After a dramatic fall, stocks have enjoyed one of their strongest rallies in the past 90 years. The S&P 500 is now down only 15% from the February record high. Intuitively, this does not seem to make sense as the US economy just had its worst quarterly contraction since the financial crisis. The second quarter is set to be significantly worse. The April employment report showed a staggering 20.5 million job losses. Furthermore, uncertainty regarding the economic reopening process and the potential of reinfection continue to weigh heavily on investors.
Offsetting the unprecedented shock to the economy is a fiscal and monetary response that has been equally unprecedented in the size and speed of its implementation. The $2.0 trillion fiscal plan, known as the CARES Act, is more than double the fiscal plan enacted during the Great Financial Crisis on a dollar basis. The stimulus was implemented almost concurrent with the onset of the recession versus taking about 10 months to pass during the financial crisis of 2008.
Markets also tend to be forward looking — improving even while the economic data and headlines remain bleak. On average, stocks have found their low about five months before the end of past recessions. Notably, following the 12 previous quarters where the US economy fell at an annualized rate of 4% or more, as it did in the first quarter, the S&P 500 was higher a year later in all cases, averaging a gain of 27% (table 1 on next page).
This analysis included the 1957-1958 recession, a period in which the global pandemic of influenza, known as the Asian flu, occurred. According to the CDC, the estimated number of deaths was 1.1 million worldwide and 116,000 in the United States. In the fourth quarter of 1957, US GDP shrank 4.1%, which was followed by a 10.1% decline in the first quarter of 1958. US stocks were up more than 30% a year following each of these negative quarters, even while it was far from a straight line higher in most cases.
Depressed Sentiment Should Help Cushion Market Downside
Another factor feeding into the perceived disconnect between markets and the economy is that stocks tend to move up or down based on how data comes in relative to expectations as opposed to whether data is good or bad on an absolute basis. Investors are no longer surprised by weak economic numbers.
From a contrarian perspective, the broad skepticism of this rally is a positive insofar as it suggests investor expectations are low and positioning is not aggressive. This should help to cushion the market’s downside on any pullback.
- The percentage of individual investors who are bearish has averaged 48% over the past eight weeks, the highest level since 2009, according to the American Association of Individual Investors (AAII).
- There has been an additional $29 billion of net fund outflows from mutual funds and exchange-traded funds over the past two weeks.
- The average recommended equity exposure from newsletter writers is just 20% compared to near 80% coming into the year, according to the Hulbert Sentiment Index.
- Short interest (bets that stocks will go down) as a percentage of the S&P 500’s float is at its highest level since 2016.
- Hedge fund beta to the market, a measure of equity exposure, remains in the bottom 10% since 2003.
There is a disconnect between the stock market and the economy. However, this is almost always the case around turning points. The disconnect is even more exacerbated now given the enormity of the coronavirus shock to the economy, which has been met with unprecedented fiscal and monetary stimulus. Also, the composition of the S&P 500, which is heavily weighted towards growth and defensive sectors, has helped this widely-followed index hold up well relative to the broader economy.
Unlike the very positive risk/reward near the lows, there is less of a short-term edge for investors after the snapback. The unevenness of the economic and earnings recovery is likely to cap the near-term market upside. However, depressed investor sentiment and positioning remains a positive from a contrarian perspective. This should cushion the extent of a market decline and also sets the market up well should there be an upside surprise on the economy or progress toward a therapeutic drug/vaccine. Accordingly, we favor an averaging-in approach for investors underweight equities and becoming more aggressive on pullbacks.
This material was provided by SunTrust Private Wealth Management for use by BB&T Wealth.
Advisory managed account programs entail risks, including possible loss of principal and may not be suitable for all investors. Please speak to your advisor to request a firm brochure which includes program details, including risks, fees and expenses.
SunTrust Private Wealth Management is a marketing name used by Truist Financial Corporation and the following affiliates: Banking products and services, including loans and deposit accounts, are provided by SunTrust Bank and Branch Banking and Trust Company, both now Truist Bank, Member FDIC. Trust and investment management services are provided by SunTrust Bank and Branch Banking and Trust Company, both now Truist Bank and SunTrust Delaware Trust Company. Securities, brokerage accounts and /or insurance (including annuities) are offered by SunTrust Investment Services, Inc., BB&T Securities, LLC, and P.J. Robb Variable Corp., which are SEC registered broker-dealers, members FINRA, SIPC, and a licensed insurance agency where applicable. Investment advisory services are offered by SunTrust Advisory Services, Inc., GFO Advisory Services, LLC, BB&T Securities, LLC, Sterling Capital Management, LLC, Precept Advisory Group, LLC, and BB&T Institutional Investment Advisors, Inc., each SEC registered investment advisers. BB&T Sterling Advisors, BB&T Investments and BB&T Scott & Stringfellow are divisions of BB&T Securities, LLC. Mutual fund products are advised by Sterling Capital Management, LLC.
While this information is believed to be accurate, SunTrust Banks, Inc., now Truist Financial Corporation, including its affiliates, does not guarantee the accuracy, completeness or timeliness of, or otherwise endorse these analyses or market data.
The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but Truist Financial Corporation makes no representation or guarantee as to their timeliness, accuracy or completeness or for their fitness for any particular purpose. The information contained herein does not purport to be a complete analysis of any security, company, or industry involved. This material is not to be construed as an offer to sell or a solicitation of an offer to buy any security.
Opinions and information expressed herein are subject to change without notice. STIS and/or its affiliates, including your Advisor, may have issued materials that are inconsistent with or may reach different conclusions than those represented in this commentary, and all opinions and information are believed to be reflective of judgments and opinions as of the date that material was originally published. STIS is under no obligation to ensure that other materials are brought to the attention of any recipient of this commentary.
Comments regarding tax implications are informational only. Truist and its representatives do not provide tax or legal advice. You should consult your individual tax or legal professional before taking any action that may have tax or legal consequences.
Investments involve risk and an investor may incur either profits or losses. Past performance should not be taken as an indication or guarantee of future performance.
STIS/STAS shall accept no liability for any loss arising from the use of this material, nor shall STIS/STAS treat any recipient of this material as a customer or client simply by virtue of the receipt of this material.
The information herein is for persons residing in the United States of America only and is not intended for any person in any other jurisdiction.
Investors may be prohibited in certain states from purchasing some over-the-counter securities mentioned herein.
The information contained in this material is produced and copyrighted by Truist Financial Corporation and any unauthorized use, duplication, redistribution or disclosure is prohibited by law.
STIS/STAS’s officers, employees, agents and/or affiliates may have positions in securities, options, rights, or warrants mentioned or discussed in this material.
Asset classes are represented by the following indexes. An investment cannot be made directly into an index.
S&P 500 Index is comprised of 500 widely-held securities considered to be representative of the stock market in general.
©2020 Truist Financial Corporation. BB&T, SunTrust®, the SunTrust logo, and Truist are service marks of Truist Financial Corporation. All rights reserved.