After equity markets plummeted during the onset of the Coronavirus pandemic, they seem to have staged a modest comeback in the past 2 months. Chris Maxey of our Investment Team discusses the reasons why in this edition of Chartology.
We’re back with Chartology and we want to talk about the equity markets this year. It’s been a strange and wild ride that we’ve been on for the better part of a couple months now, and we want to talk about why that is.
So, the first thing you see here is what’s happened with the S&P 500 year-to-date through the middle of May. As you see in January and February, markets were relatively calm. In fact, we were reaching new all-time highs, and people were feeling relatively sanguine about everything that was occurring at that point in time. It became clear that sentiment was shifting, and it shifted rather abruptly as the Coronavirus pandemic spread around the globe. By the middle of March, we had seen the S&P go from being up 5-6% on the year to down as much as 30%. Now subsequent to that, the market has been recovering pretty consistently over the course of the last two months, but we find ourselves down 10% on the year. Why is that?
Well, there are two main reasons, and then a third tertiary reason that we’ll talk about. The two main ones are that, first, central bankers globally had a very coordinated response to support financial markets, and that injection of liquidity was quite supportive in stopping the sell-off. Secondarily, governments around the globe passed stimulus measures to stem the economic pain that was being felt, or at least that was expected to be felt in the coming months, and weeks, and days. And both of those things were extraordinarily large measures that were passed, far in excess of what we saw coming into 2008 and 2009. So that was very supportive of the stock market.
Now the other thing that that has been helpful, particularly for large-cap U.S. companies, is that as you think about what’s been going on in this environment, a number of trends have been accelerated – work from home being a very prime example, delivery of just about everything, whether it’s groceries, electronics, anything else that we can think of. Those trends have all been accelerated, and for a subset of companies that’s actually been quite beneficial, right? As we look at earnings growth estimates, which you see here on the chart, we can look at December 31st of last year and contrast that with May 19th, where the expectations are for the rest of this year now. For the S&P 500, the expectation was that we would see 10% earnings growth over the course of the year. Now it’s expected that earnings will drop by 21%, much of that occurring in the second and third quarters.
Now a handful of sectors are going to be particularly hard hit, and I don’t think anyone will find that surprising. As you think about what’s going on in energy markets, those companies are having a very difficult go of things. Other companies though, as you can see on the left hand side, that are faring better – utilities, consumer staples, technology, healthcare – the picture hasn’t changed that dramatically for those sectors, in part because tech is benefiting from what is happening at the moment. Healthcare companies are certainly in demand and in need in this particular period of time. And why is that important?
Well, as you look at tech and healthcare alone, those two sectors make up 41% of the S&P 500 index. That suggests that they are both very important in terms of what’s happening, and they’re very supportive of the rebound that’s taken place over the last two months. Add in utilities, consumer staples, communication services, real estate, you’re now talking about two thirds of the index representation there. Those companies just simply haven’t been impacted as negatively in this environment as what we’ve seen in the other ones that I mentioned – energy, financials being two big examples. As you can see there with energy, that’s only a 3% weight in the index. So it’s very important to understand that market dynamics have changed over time, and as a result, one of the things that we’ve seen happening is that the S&P has recovered as people have started to tease out “Well these companies are doing better vis-à-vis these ones, these sectors, these industries are doing better vis-à-vis these other ones.”
We hope you will find this helpful in understanding why the market has seen somewhat of a recovery here over the last two months. We certainly don’t know whether this will perpetuate and continue. We will keep an eye on it and obviously report back as things transpire and things evolve.
If you have any additional questions, please reach out to a member of our team or your advisor. Thank you!