Market Mood Swings as Stocks Take a Breather

This week, the market just felt calmer. After two weeks of double digit moves in the S&P 500, the index ended the week relatively flat, down 2.3%. Even though volatility remained high by historical standards, it wasn’t as high as in recent weeks. Debt markets cooled and talk of new government stimulus began. Lots of uncertainty remains, but investors seem to be looking past 2020 as they make investing decisions.

During the week, investors focused on reasons to remain resilient despite some tough news and weakening economic trends.

Financial Markets’ Resiliency

Normally, this week’s dose of negative headlines (we’ll get to that in a minute) would rattle markets more, but there are few reasons investors stayed relatively upbeat.

While economic data is deteriorating, most reports haven’t been as bad as Wall Street has expected. Financial markets have also responded well to the Federal Reserve’s liquidity efforts. Stock volatility has calmed from historic levels and credit spreads, which generally rise as corporate debt becomes riskier, dropped for six straight days through the end of March. Investors also found comfort in the potential for additional stimulus to come from Congress in the form of funding for state and local governments and infrastructure spending. Stimulus checks, bolstered unemployment benefits and small-business financial relief have already been approved, thanks to the $2 trillion fiscal package passed on March 27.

Stocks’ seasonality may also be turning in investors’ favor. April has historically been a strong month for U.S. stocks, especially recently. Over the past 20 years, the S&P 500 has risen an average of 1.8% in April, its best monthly performance out of the whole year. The benchmark has also closed higher in the month of April 13 out of the past 14 times. We don’t know exactly why April is such a consistently strong month for stocks. It could be that April typically brings with it the tax deadline, the start of a new quarter, a looming “sell in May” period, or blooming flowers that put investors in such a good mood. But the returns don’t lie – there are seasonal tailwinds out there.

A hard reality.

As coronavirus cases and deaths continue to rise, the White House gave a grim warning that the next two weeks could be difficult for the U.S. as the virus spreads, sparking a 4.4% S&P 500 selloff on Wednesday. Documents showing China allegedly under-reported coronavirus deaths added fuel to the fire, indicating there is less information available to gauge how serious or how long this outbreak could be.

While weeks of social distancing and shutdowns have been the right call to contain the spread, it’s becoming a little more apparent how much these measures will weigh on economic activity. Data showed that nearly 10 million people have filed for unemployment in the past two weeks. U.S. companies also cut 700,000 jobs last month, the first time hiring fell during a month in nearly 10 years.

In turn, U.S. consumers are becoming nervous about their future. A Tuesday report showed the Conference Board’s Consumer Confidence Index slid the most since August 2011 (during the U.S. debt crisis) in March. Unemployed consumers have lost income, and those who are still employed are likely saving more and spending less. Consumer spending accounts for about 70% of gross domestic product, making the consumer a key to the engine of the U.S. economy.

Lower demand has also weighed on manufacturing, which is considered a signal for the economic outlook. Details inside the Institute for Supply Management (ISM) report showed new manufacturing orders fell to the lowest level of the economic cycle, hinting that a slowdown is imminent.

What to watch next.

It’s too soon to tell if stock bulls or bears will win in the near-term. The bear market’s path could be determined by how severe this economic slowdown will be, and the economy’s response will depend on how effectively the U.S. can get coronavirus under control.
We could see a “V-shaped” economic trajectory (quick dip, quick recovery) or a “U-shaped” trajectory (quick dip, slower recovery). In our view, we haven’t seen the worst of economic downturn yet, even though the jury is still out on what the economy could look like in the next few months.

First-quarter earnings season, which will kick off in a few weeks, could also provide important clues on how company executives expect coronavirus to affect profits. One thing is for sure, continued volatility remains in the cards. As always, remember your goals when making investing decisions. Sticking to your investing plan during uncomfortable times (and ignoring short-term moves) could be the best approach for your portfolio and your sanity.

The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.
 

Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.

Lindsey holds a passion for teaching individuals how to become successful long-term investors. She frequently shares her knowledge as a guest on national news outlets such as CNBC, CNN, Fox Business News, and Bloomberg News. She also serves on the board of Better Investing, a non-profit organization focused on investment education.