S&P 500 surges as Congress passes $2.2 trillion economic relief bill

It’s just your money. It’s not your life. The figures on a broker’s report mean little compared to that. The people who loved you a week ago still love you today. – Louis Rukeyser, American financial columnist and television commentator, referring to Black Monday on October 19, 1987

On the backs of a $2.2 trillion fiscal stimulus bill or economic relief package passed on Thursday by the Senate and Friday by the House, the stock market climbed out of its hole to post solid gains for the week. The S&P 500 Index, after being down more than 30% for the year on Monday, staged a furious rebound by surging over 10% for the week while the Dow rose 21% in just three days, the fastest rise ever from a bear market to a bull market. The last time the Dow rallied this much off a bear market low was way back in 1931. While the 20% plus rise fits the technical definition of a bull market, the rebound in stock prices could be more aptly called a bear market rally as the volatility is likely to continue and there is a possibility that the market could retest the low set on Monday. Nevertheless, between the recently passed relief plan and the unprecedented monetary policy tools being implemented by the Federal Reserve, a bridge is being formed to stabilize the economy until the coronavirus is contained and we begin to see a decline in the number of confirmed cases of people with the virus. Unfortunately, the news on this front is likely to get worse before it gets better and the economy is either already in a recession or likely to experience one in the second quarter. The unemployment rate could rise sharply in coming months as the economy effectively shuts down. Evidence of this trend occurred this week as the weekly jobless claims soared to 3.28 million compared to only 281,000 in the previous week. This number surpassed the all-time high mark of 695,000 in October 1982 and 665,000 during the Great Recession in 2008 and 2009. As Federal Reserve Chairman said, this is not a typical downturn. It is first and foremost a health crisis that has morphed into an economic crisis. Given the firepower that the Federal Reserve and the government have unleashed on the financial system and the economy, the U.S. economy should rebound fairly quickly after going through a sharp recession. It is only hoped that the virus can be contained as quickly as possible.

Last Week

U.S. durable goods orders in February rose modestly and were better than expected, but are likely to fall in subsequent months due to the impact of the coronavirus. New home sales fell in February but also were better than expected while the University of Michigan consumer sentiment index in March fell to its lowest level in 3 years. Both the IHS Markit’s Purchasing Manager’s Index (PMI) for the manufacturing and services sectors fell below 50 into contraction territory.

For the week, the Dow Jones Industrial Average jumped 12.8% to close at 21,636 while the S&P 500 Index climbed 10.3% to close at 2,541. The Nasdaq Composite Index rose 9.1% to close at 7,502.

This Week

The March employment report is expected to show that there was a decline of about 150,000 jobs and that the unemployment rate rose from 3.5% to 3.9%. ADP is expected to report a loss of about 360,000 private sector jobs in March, the first decline in jobs since 2010. Both the ISM manufacturing and non-manufacturing or services sector indices are forecast to fall well-below 50, a sign that the economy is beginning to weaken significantly.

Among the most prominent companies scheduled to report their quarterly earnings this week include Conagra Brands, McCormick & Co., CarMax, Walgreen Boots Alliance and Constellation Brands.

Portfolio Strategy

Not only has the stock market experienced tremendous volatility over the past month, but the fixed income market has also undergone unprecedented dislocation as investors seek safety and liquidity. The uncertain market environment has caused security pricing to be driven by fear and panic. That behavior was evident last week as the yields on both the 1-month and 3-month Treasury Bills were briefly negative before rebounding to positive territory with yields of 0.01% and 0.03%, respectively. Yields on longer-term Treasuries weren’t much higher as the 2-year Treasury yielded 0.25% and the 10-year Treasury yielded only 0.72%. (Bond prices and yields are inversely related). Investors sold any investments with even the slightest amount of risk, including investment grade corporate notes, and sought safe havens in the form of money market funds and Treasury securities. Two funds that have been temporarily affected by this dislocation but still are considered very conservative and defensive in nature are the Weitz Short Duration Bond Fund (WEF1Z) and the JP Morgan Ultra-Short Income ETF (JPST). The Weitz Fund is a multi-sector bond fund that invests primarily in U.S. Treasury and Federal Agency securities, mortgage-backed securities, asset-backed securities and high quality corporate notes with an average maturity of only 2 years. While the net asset value of the fund is down slightly during this market sell-off, the mispricing of securities caused by panic-driven selling has created opportunities within the fund that the manager has taken advantage of and should result in improved performance as the year goes on. The JP Morgan Fund also seeks to deliver current income while maintaining low volatility of principal. This fund holds nearly 700 securities that mostly include investment grade corporate bonds, Treasuries, asset-backed securities and cash. Its average maturity is just 1 year but like the Weitz Fund, it has seen some principal erosion due to the unprecedented dislocations in the corporate bond market. When the markets settle down and eventually get back to normal, both funds should be able to recover and provide investors with positive returns for the year.