In the midst of great economic pain, 95% of firms are trading above their 50-day moving average, the S&P 500 is now just 9% off its highs.
Investors favored US exposures and the healthcare sector in May
The greatest trick the market ever pulled is trying to convince investors that this recession doesn’t exist. In May, all US sectors had positive returns, with 23 out of 24 industries up as well. Globally, only 12 countries had negative returns, with 62% of all global stocks up on the month. That is just for May, starting from the market’s bottom (March 24), and 85% of stocks around the world have positive returns.1
Economically, however, millions of jobs have been lost around the globe, and some industries (leisure, hospitality, travel, office real estate) may not get back to “normal” for years – if at all. Global GDP growth is now expected to decline by 3% in 2020, with numerous developed and emerging market nations entering a technical recession.2
Even with all this anguish – economic, fundamental, mental and societal – the stock market appears to be a bit unfazed. No one is routing for double-digit losses and depressed stock prices, but there is a disagreement between the tape and the news flow.
There is a justification for it, however. T.I.N.A. is back, as There Is No Alternative to stocks right now, as a result of the generation-defining low interest rates.
The US 10-year yield is 0.65%. Accounting for inflation, the real yield is 0.31%. Real yields in Japan and the Eurozone are negative. In order to earn a real return, investors have to take risks and own risky assets, like stocks.
It might be just that simple, as cynical as it is. But it’s not a surprise, given that central banks from around the world have injected trillions of stimulus into the financial markets in hopes of it trickling down into the real economy.
Unfortunately, it’s unlikely for it to be on a dollar-for-dollar basis in the end ─ potentially stoking more divisiveness and inequality unless there are other policy changes aimed at remedying those longer-term issues.
In the near term, however, there are risks to the T.I.N.A trade. Negative earnings and downbeat economic data may catch up to it, as T.I.N.A. is walking on a knife’s edge. Macro volatility remains high, economic uncertainty is at record levels,3 and COVID-19 cases are still rising, albeit at a much slower pace. Given the risks of a T.I.N.A.-driven market, a portfolio’s core should likely have a defensive, high-quality bias.
No international travel Similar to April, investors favored US over non-US exposures – mirroring the performance trends, as the US has been outperforming non-US markets by almost 7% since the start of April.
With the exception of global mandates, all other non-US segments had outflows. International single-country funds had the most outflows in May, driving the year-to- date outflow total to over $10 billion. And it’s not just from one country, either, as 52% of countries tracked had net outflows in May. Asian nations had the most, however.