A month in review of events and market moves to sort through.

Our Top Market Takeaways for May 1, 2020.

April showers

What a month. Here’s a review of what happened in April. In short, there was a torrential downpour of events and market moves to sort through.

  1. A pandemic ravaged most of the populated world. There were 2.4 million new confirmed cases of COVID-19 in April. Over 300,000 of those cases were in New York and New Jersey.
  2. The S&P 500 had its best month since 1987. The index gained +12.7%. Some emerging market indices (Taiwan’s TAIEX, the FTSE South Africa and India’s SENSEX) outperformed the S&P 500.
  3. Twenty million more American workers filed for unemployment insurance. It would not surprise us to see the unemployment rate spike to around 20%, which would be the highest since the Great Depression. However, there is more here than meets the eye. According to some estimates, around three-quarters of the workers who have been laid off are actually earning more now through unemployment insurance than they would have been at their jobs.
  4. Investment grade bonds had their best month since 2008. They gained +5.7% as the Federal Reserve dusted off several crisis-era facilities (and created some new ones) that are designed to get credit flowing to the economy.
  5. Speaking of the Fed, its QE4 program has already outpaced QEs 1–3 in terms of Treasury purchases as a share of GDP. Its goal was to reduce volatility in Treasury markets, and boy did it succeed. Treasury volatility is back to where it was when COVID-19 was contained to Hubei. In all of April, 10-year Treasury yields rose from…0.60% to 0.64%.
  6. West Texas Intermediate (WTI) crude prices traded in negative territory. That means investors who had bought contracts entitling them to actual physical barrels of crude oil actually paid to have them not delivered. Oil prices are challenged for a simple reason: There is too much oil in the world! No one is traveling (by plane, train or automobile), and suppliers have not cut enough production to keep supply in balance with demand. However, there are some (very early) green shoots. It seems like gasoline demand, for example, may have bottomed, and requests for driving directions from apps are rising.
  7. The energy sector was the second-best-performing sector in the MSCI World (+16%). Utilities were the worst (+3.2%). The coast is by no means clear for the energy sector. It’s still down roughly -40% from its 2020 peak, and almost -60% below its 2014 high. In a sign of the times, Royal Dutch Shell cut its dividend for the first time since World War II.   
  8. The market split the winners from the losers. Cruise lines, airlines, oil and gas producers, hotels, banks and apparel are all more than 40% below their 52-week highs. Meanwhile, software stocks, water utilities, biotechnology companies and semiconductors are within 20% of their 52-week highs. On a country basis, New Zealand, Denmark, China, Taiwan and the United States have been relatively resilient, while Brazil (and other Latin American country stock indices), Greece, Austria, Russia and the hard-hit European periphery are well below their 52-week highs.
  9. The rich got richer. Investors are flocking to the perceived safety of big secular growers during the uncertainty caused by COVID-19. The “Big 5” stocks of Microsoft, Apple, Amazon, Alphabet and Facebook gained ~$640 billion of market cap on the month. That’s more than enough to buy the smallest 100 constituents in the S&P 500 at current market prices. The last day of April brought an odd occurrence: All five of those stocks ended in positive territory, but the index as a whole ended down. That has happened only 14 other times since Facebook’s IPO in 2012 (a 0.72% chance, based on daily trading sessions).


Where do we go from here?
In large part, the path of the virus will decide. However, the current mix of support from both fiscal and monetary policy, combined with signs that we are past the peak in intensity of the COVID-19 crisis, leaves us cautiously optimistic about the future—even if the stock market may have to digest its torrid April rally in the near term. But what to do about that concentration at the top of the U.S. stock market?

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Much ado about concentration

The five-biggest stocks in the S&P 500—Microsoft, Amazon, Apple, Alphabet and Facebook (collectively, FAAMG)—now comprise more than 20% of the total market value of the index. This, along with the broad market’s eye-popping rally of narrow breadth and high dispersion, has fueled concerns about the fragility of the S&P 500’s +30% recovery off its March 23 low.

Here’s the thing: The trends haven’t changed, they’ve just been amplified by the COVID-19 crisis. FAAMG’s share of the S&P 500’s total market value has been on the rise for the better part of the decade. In the same vein, the performance of an equal-weighted portfolio of those five stocks has trounced the performance of the S&P 500 as a whole.

Line chart shows FAAMG (Microsoft, Amazon, Apple, Alphabet and Facebook) as a share of the S&P 500 total market value. It indicates that over the past decade it has been on the rise, and in 2020 comprises more than 20% of the total market value of the S&P 500.

Line chart shows FAAMG (Microsoft, Amazon, Apple, Alphabet and Facebook) as a share of the S&P 500 total market value against the S&P 500 performance as a whole. It indicates that from 2015 through now, FAAMG has outperformed the S&P 500 during this time period.

We think such dynamics have to do with the broad recognition that these companies are among those that can grow regardless of systemically slow (or negative) economic growth. Before the COVID-19 pandemic began, investors had grappled with the slowest economic expansion on record, forcing them to find the companies that were leaders in innovation and market share in order to amplify their returns. Now, in the midst of the pandemic, investors are rationally focusing on the companies that are poised to thrive even in an exceptionally dire environment. Facebook, Apple, Amazon, Microsoft and Google are representative of the kinds of companies that fit both bills.

So how does this get resolved? Well, it doesn’t have to, per se. Consider the MSCI United Kingdom Index. The top-five stocks account for almost 30% of the index. In Germany, the top-five stocks are ~45% of the index. However, investors in the S&P 500 generally believe this type of concentration indicates a fragile market. A positive outcome for equity investors would be one where the economic recovery from the COVID-19 crisis exceeds expectations, so that capital flows from the big secular growers back to the cyclical and value parts of the market (like financials and energy), and evens out the weightings naturally. A negative outcome would be one where the big growers disappoint relative to investor expectations. So far, it seems like the Big 5 had earnings reports that supported the current investor belief that they are relatively well positioned to weather the storm…but concentration makes the index vulnerable to even marginal changes in sentiment or fundamentals.

There’s only so much heavy lifting the market’s darlings can do when it comes to a sustained market recovery. In order to get back on track, a large swath of companies in the S&P 500 (and around the rest of the world) needs to see the virus in the rearview mirror and signs that the broader economic backdrop is poised to improve. Until then, it seems like a downside case is more likely than the upside case in the near term. As such, we’re approaching the index as a whole with an abundance of caution, but finding opportunities in other components of the same secular growth trends that could thrive in the post–COVID-19 world. The FAAMG stocks aren’t the only game in town.

#ShowMeYourWalk

Throughout this period of social distancing, we’ve been inspired and delighted by people’s creativity in celebrating healthcare and essential workers, birthdays, holidays, and the like. Now, we want to join all of the high school and college graduates in celebrating their big milestones! JPMorgan Chase CEO Jamie Dimon is teaming up with some special friends (including Kevin Hart, Serena Williams and Stephen Curry) to start the party with a live #ShowMeYourWalk celebration this Saturday, May 2, at 2:00 p.m. E.T. Help us make it extra special by tuning in live via Chase’s Twitter or YouTube page and tagging all the graduates you know! 

 

 

All market and economic data as of May 2020 and sourced from Bloomberg, FactSet and Gavekal unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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