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Best Month in Decades

The US stock market rallied immensely in April as investors became increasingly confident that the most adverse pandemic scenarios were unlikely to play out.

The S&P 500 rose 13% during the month, the best monthly gain since 1987. From the stock market peak on February 19 to its bottom on March 20, stocks fell 32%, the sharpest selloff since the Great Depression. In the six weeks since the bottom, stocks have rallied a very strong 26%.

Our Persepctive: First, it’s important to keep in mind that, in percentage terms, recovery rallies must be much larger on the way back up than they were on the way down.

At the bottom on March 20, stocks would have required a 47% rally in order to recover their prior high.

Source: Bloomberg.

Second, at the bottom, we felt that the risk-reward balance was substantially in favor of buying stocks. But as the market rallied, our prior enthusiasm for adding to stocks faded.

Since then, the market has surged on a mix of positive news, hope, and optimism. Many stocks are no longer trading at prices as attractive as they were before.

As a result, we believe a more neutral portfolio positioning is appropriate.

We continue to encourage those investors who are not using an active manager to consider the selectively and flexibility that come with a hands-on investment approach.

Black Gold No Longer

In April, US-based crude oil futures contracts traded at negative prices for the first time in history as oil buyers, investors, and speculators alike fled the beleaguered commodity.

Oil prices have since rallied, and are in positive territory again, but they remain far below profitability levels for most energy producers.

Our Perspective: With many people staying home and not traveling, demand for crude fell off a cliff. We believe this is likely to lead to a large supply response, meaning that we expect producers to dramatically cut back on production.

Our active investment processes have led us to look closely at the energy sector for potential opportunities. For example, one such attractive opportunity is with select businesses in the natural gas industry.

For more on the technicalities of how oil prices can become negative, see our frequently asked questions page on our website, Answering Your Investing FAQs.

Re-assessing the Economy

As of Thursday, April 30, the number of initial unemployment claims filed over the past six weeks totaled over 30 million.

The US labor force is approximately 160 million people, of which, around 3.5%, or 5 million were already unemployed before the pandemic hit.

Add in the 30 million new claims, and the unemployment rate is now likely nearing or already at the 20%+ range.

Our Perspective: With entire sectors of the economy completely shut down, we believe the economic damage has been severe.

We expect the economic data to show a strongly negative growth rate for at least the second quarter. We also believe the economic recovery will not be immediate.

When the economic recovery begins, our expectation is that it will be subdued. We believe growth will remain below pre-crisis levels for some time.

For more, see our recent blog post, Economic Impact of COVID-19.

Our View
Economic Cycle		Global economic growth is rapidly decelerating, the extent of which remains unclear; most international economies have ground to a halt; the possibility of a recession is now very much in the cards, if not outright likely at this point
Stock Market		No longer at all-time highs, stocks entered their first bear market in over a decade in March; since then, an abundance of global liquidity has aided equities; our long-term equity return expectations have improved, but they are not overly enthusiastic
Bond Market		Recent central bank policies have been extreme and unprecedented; additional policy measures will require creativity, breaking further into the realm of the unknown; negative and ultra-low interest rates will be a major challenge for long-term fixed income returns
Foreign Exchange		A flight to safety drove US dollar strength as markets became volatile; over the long term, conditions persist for the US dollar to gradually weaken as a result of highly expansionary fiscal and monetary policies
Important Issues on the Radar		Coronavirus: expectations have risen for a treatment and/or cure in the short- to intermediate-term; should the virus prove more difficult to corral and defeat, then it could be a catalyst for additional economic and financial market weakness Trade Tensions: recent events suggest that populism and nationalism may lead to renewed international tensions (i.e., US blaming China for the virus) and could become an additional catalyst for further de-globalization measures

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The S&P 500 Index is an unmanaged, capitalization-weighted measure comprised of 500 leading U.S. companies to gauge U.S. large cap equities. The Index returns do not reflect any fees or expenses. Dividends are accounted for on a monthly basis. Index returns provided by Bloomberg. S&P Dow Jones Indices LLC, a division of S&P Global Inc., is the publisher of various index based data products and services, certain of which have been licensed for use to Manning & Napier. All such content Copyright © 2020 by S&P Dow Jones Indices LLC and/or its affiliates. All rights reserved. Data provided is not a representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and none of these parties shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

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