By , David Bailin, Chief Investment Officer, and Steven Wieting, Chief Investment Strategist and Chief Economist
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We examine why markets have performed so strongly relative to the economic news and our EPS projections. But the road to economic recovery may still be harder than many believe.
The brutally insidious nature of the COVID-19 pandemic and its impact on the global economy have come into clear focus this week. The United States and New York are now the epicenters of the disease and 20 million Americans have lost their jobs in 4 weeks. To add perspective, the job loss is 90% of all the jobs created since the Global Financial Crisis. US unemployment ended 2019 at 3.5%. It could rise as high as 20% by May or June if one counts all the workers who have lost jobs whether or not they are seeking work.
In the meantime, the S&P 500 gained 28% over the past 18 trading days. That is the fastest bounce over three weeks since 1933.
So, why are markets so comparatively well-behaved relative to the economic news and our EPS projections? There are three factors that explain the market performance to date, in our view:
The first is the finite nature of the pandemic. With the development of a vaccine and/or the broad exposure of the world’s population to COVID-19, there will be an end to health impact of the virus. Assuming positive clinical trial results, a vaccine could be ready for full deployment in 18 to 24 months. Investors may be looking out further than their normal “6 months”.
The second is the sufficiency of the federal government’s response. The CARES plan will deliver $2 trillion in Federal spending within 6 months. The Federal Reserve has increased its lending by over $2 trillion in just 5 weeks. These two actions, valued more than $4 trillion, have been impressive for their speed and size. Relative to the depression and Great Financial Crisis, these actions were taken pre-emptively, anticipating an exogenous, severe crisis. Markets also expect further support and will likely get it, if needed.
The third – and this is less appreciated, but arguably as important as points one and two – is the concentration and complexion of the market itself. The Russell 3000, a representative proxy for the entire U.S. stock market (2,971 names), is valued at $29.6 trillion as of April 17th. The top 30 stocks in that index account for $11.1 trillion or 38% of value. And of those top 30 names, there are 12 technology and internet stocks (23% of market value: Microsoft, Amazon, Google, Apple, Facebook, Visa, Intel, Mastercard, Netflix, Nvidia, Cisco and Oracle) that have led the market through the crisis. Five are up on the year and only Facebook and Mastercard are trading as poorly as the S&P 500 Index generally. The degree to which the market leaders perform will have a disproportionate influence on how the indices perform. Thus, for us to return to the lowest levels of the market on March 23, we would have to see a major hit to these market leaders.
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