Key Investment Perspectives: May 2020
April brought a seemingly unending stream of bad economic news with it. Soaring unemployment more than wiped out all of the employment gains since the Great Recession ended 11 years ago. The nation’s GDP plunged, consumer confidence recorded its largest decline in more than 40 years and manufacturing activity fell deeply into contraction territory.
Yet since bottoming at 2,237 on March 23, the S&P 500 Index rallied more than 30% through the end of April. Why did equities rebound so strongly in such a harsh environment?
We see three possible explanations:
- The market is getting it wrong.
- Investors are looking through this dislocation and remain optimistic that there will ultimately be a meaningful recovery.
- April’s market strength comes as a result of the massive and timely interventions of the Federal Reserve.
We examine each of these interpretations in this month’s issue, along with a review of our current tactical asset allocation positions and major asset class performance in April.
- Global Equities: In spite of the sharp economic decline, the S&P 500 Index advanced 12.8% in April to post its best month since January 1987. The S&P 500 is now down 9.3% in 2020 on a year-to-date basis. Similar narratives unfolded globally: For the month, developed international equities and emerging market stocks were up 7.6% and 9.6%, respectively.
- Fixed Income: US Treasuries returned 0.6% in April, bringing the YTD return to 8.9%. Returns were highest at the long end of the curve: 30-year bonds gained nearly 2% for the month. Investment-grade corporate bonds returned 5.2%, while high-yield bonds rose 4.5%.
- Tactical Allocation: We are maintaining a modest underweight to equities with a bias toward quality and growth stocks, balanced in part by an increased allocation to oversold domestic small cap equities. We continue to prefer a modest overweight to investment-grade corporate bonds while underscoring the importance of maintaining a quality bias in fixed income. For many investors, hedge funds remain an important part of a diversified portfolio, especially in a time of heightened market volatility.