Equity markets continued their rebound in May as the S&P 500, a widely followed barometer for US stock performance, gained 4.8%. The index is down -5.0% year-to-date through month-end. Overseas equities lagged slightly, with the MSCI ACWI ex-US index rallying +3.2% in May for a YTD return of -14.9%.
Within fixed income, the Barclays US Aggregate Bond Index gained +.4% in May as long-term interest rates continued to head toward historic lows. Credit markets continued to respond favorably to the Fed’s and Congress’ support of the economy, reducing fears of default amongst investment grade issuers. In the commodity space, energy markets rebounded from their historic April lows. Gold continued to rally, with spot prices climbing over +2% on the month. [4]
As always, we aim to interpret the vast array of economic and market data through our Three Dials lens, helping to provide our clients with a steady anchor against the winds of this ever-changing situation. Below is a snapshot of where each of our primary indicators stand as of the end of the month:
Due to the continued rally, the S&P 500 climbed above its’ long-term support level. Our base case remains that the market lows seen in March will hold. That fact is supported by such a strong rally off the bottom. However, plenty of downside risks remain, as double-dips often manifest themselves in bear markets such as this. Continued volatility is likely, as are higher returns in the coming 12 months. Thus, our Momentum Dial has improved to "Neutral” for the time being.
The Conference Board Leading Economic Index® for the U.S. declined 4.4% in April, following a 7.4% decline in March [1]. With over 40 million Americans having filed for unemployment since the start of the pandemic and the real jobless rate over 23.9%, the global economy faces a long road to recovery [2]. As such, our Economic Dial remains in a “Negative” position.
A rally in stock prices in the face of deteriorating earnings indicates that, while stocks sit well below their all-time highs, valuations remain stretched by most historic metrics. There may yet come a day where stocks become a “hold your nose and buy” bargain, but, until then, our Valuation Dial remains “Negative”.
Although the negative reading in two of our three dials indicates a reasonably defensive posture, there are definitely “green shoots” appearing as the economy slowly reopens. The daily number of passengers screened at TSA checkpoints in the U.S. was 87,534 on April 14th and 318,449 on May 21st [3}. We reiterate that the market lows may already have been established, but given common pattern of double bottoms in bear markets, we find it prudent to apply a degree of caution going into the coming months. As always, having a plan and sticking to it wins out in the end, and Archetype’s asset allocation framework, built around our Three Dials philosophy, is built to help clients invest with confidence for the long haul in all market environments.
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Sources:
[1] https://www.conference-board.org/pdf_free/press/US%20LEI%20PRESS%20RELEASE%20-%20MAY%202020.pdf
[3] https://www.statista.com/statistics/1107016/coronavirus-tsa-checkpoint-travel-numbers-us-airports/