7. Recent volatility has accelerated the ongoing concentration in the U.S. stock market.Somewhat amazingly, the five largest U.S. companies (Microsoft, Apple, Amazon, Facebook and Alphabet) now comprise over 20% of the S&P 500 market capitalization.1 In contrast, over 300 of the companies in the index have a weighting of less than 0.1%.1
8. Market sentiment is improving. Value styles, cyclical sectors and small cap stocks have outperformed recently, reflecting improved hopes for economic growth and increased confidence that the global economy will reopen as virus pressures slowly ease.
9. Volatility is likely to remain high in both positive and negative directions. Stocks remain caught between the massive $8 trillion in fiscal and monetary stimulus on the positive side and collapsing economic and earnings growth on the downside. We’re optimistic over the longer term, but think markets could experience a period of weakness ahead.
10. The odds of a near-term market decline remain high. On February 19, the S&P 500 Index peaked at 3,386, before sinking to 2,192 on March 23.1 Last week saw a high of 2,954 before the market sank 4.5% on Thursday and Friday to close at 2,832.1 We would not be surprised to see stocks drop back to the 2,550/2,600 level over the coming weeks before attempting to rally again.
An Uneven Economic Re-Opening Will Likely Prompt More Volatility
Infection rates continue to rise in some areas of the world and, but there is a sense that the worst of the storm has passed. Hot spots such as Italy and New York are showing better data, and broad trends indicate that aggressive countermeasures have effectively limited coronavirus contagion.
Most of the world is now moving to a new and highly uncertain phase of economic reopening. The biggest risk, of course, is that without widespread and repeated testing, let alone effective treatments and vaccines, we could see renewed surges of infections as economic lockdowns start to ease. And even if we are largely able to avoid fresh coronavirus waves, reopening economies will be uneven and uncertain, making it difficult to gauge the outlook for global economic growth into 2021 and beyond. But it is safe to say that the economy will be operating well below pre-crisis levels for some time, which will negatively affect earnings, profits and many financial asset values.
The good news is that the aggressive and unprecedented fiscal and monetary policy response has been a clear positive for equities and other risk assets. Although economic growth is in the midst of a widespread collapse, we think stimulus measures will help set the stage for the start of a recovery later this year.
Since the start of the current crisis, we have argued that containing the spread of the coronavirus will be the first and most critical condition necessary for improvement in the economic outlook and sustained upside in risk asset values. We may soon find out how well those steps have been working. Over the near term, market volatility is likely to remain high in both directions, making portfolio positioning a challenge. As we have been saying for some time, we think investors with long-term time horizons may want to consider using periods of near-term weakness as buying opportunities.
Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen.
1 Source: Bloomberg, Morningstar and FactSet
2 Source: Bureau of Labor Statistics
3 Source: Credit Suisse Research