Perspective on recent global equity market performance

5.28.20 | Market News

Financial markets and the investors who constitute them can oscillate between two powerful emotions: fear and greed. While 2019 seems like a long time ago, investors exited that year with robust gains across equity indices, with U.S. stocks registering substantial gains compared to their international developed and emerging market peers, which also delivered strong absolute returns, as Table 1 indicates.

Table 1: Select Index Returns: Calendar Year 2019

Representative Index

2019 Total Return

U.S. Large Capitalization Stocks:

S&P 500

31.5%

U.S. Mid Capitalization Stocks:

Russell MidCap

30.5%

U.S. Small Capitalization Stocks:

Russell 2000

25.5%

International Developed Stocks:

MSCI EAFE

22.8%

International Emerging Stocks:

MSCI Emerging Markets

18.8%

Source: U.S. Bank Asset Management Group Research, Bloomberg.

Heading into 2020, the global economy was growing (albeit below its long-term potential), central banks were either providing accommodative policies or were largely on the sidelines, and financial markets were placid. However, the calm surroundings quickly gave way to COVID-19 developments in late February, and market volatility cut across all asset classes, and of course stocks.

As we look at performance from February 19, 2020 (when the S&P 500 reached all-time highs) to March 23, 2020 (the date that hopefully represents the coronavirus-induced low for most major global stocks), these indices gave back their full year 2019 returns and then some. Mid- and small-capitalization stocks were especially vulnerable as investors worried about their access to credit and narrower business mixes.

Table 2: Select Index Returns: February 19, 2020 – March 23, 2020

Representative Index

Total Return

U.S. Large Capitalization Stocks:

S&P 500

-33.8%

U.S. Mid Capitalization Stocks:

Russell MidCap

-40.3%

U.S. Small Capitalization Stocks:

Russell 2000

-40.7%

International Developed Stocks:

MSCI EAFE

-32.7%

International Emerging Stocks:

MSCI Emerging Markets

-31.2%

Source: U.S. Bank Asset Management Group Research, Bloomberg.

Since March 23 and through today, we have seen a massive rally in all five indices, led by mid- and small-capitalization stocks, as we see in Table 3 below. Interestingly, small-cap stocks have rallied 16.6 percent in the past two weeks alone, more than doubling large-cap returns.

Table 3: Select Index Returns: March 23, 2020 – May 27, 2020

Representative Index

Total Return

U.S. Large Capitalization Stocks:

S&P 500

36.2%

U.S. Mid Capitalization Stocks:

Russell MidCap

40.0%

U.S. Small Capitalization Stocks:

Russell 2000

43.7%

International Developed Stocks:

MSCI EAFE

27.3%

International Emerging Stocks:

MSCI Emerging Markets

22.9%

Source: U.S. Bank Asset Management Group Research, Bloomberg.

Broad market indices include multiple sub-indices that track how individual industries perform; the S&P 500 includes stocks from 69 sub-indices ranging from Telecommunication Services to Biotechnology to Oil & Gas. Given where we may be at any point in the economic cycle, certain sub-indices may be performing better than others. Interestingly, at periods of significant market stress or market ebullience, these sub-indices may demonstrate more convergence and lack of differentiation; in good times, the tide lifts all boats, and in bad times, the tide comes in for all.

In the past two weeks, some of the weakest-performing sectors dominated sub-index performance: Airlines are up 39.1 percent, Consumer Finance is up 31.4 percent and Real Estate Management has rallied 29.6 percent, as measured by S&P 500 sub-indices. On the downside, the Biotechnology and Pharmaceuticals sectors posted negative total returns over the past two weeks, despite both handily outperforming the S&P 500 year-to-date through May 27 and Biotech registering a positive 8.3 percent total return. In short, across sectors, we are seeing a “catch up” of some of the most challenged sectors heading into the downturn ― sectors that are still dramatically underperforming the broad indices but are seeing some signs of fundamental improvement.

In addition to sub-index performance, we also analyze individual company performance. As the mantra goes, “in price is truth,” meaning that at a given instant within the stock market, a buyer and a seller agree at a level in which to exchange shares of a given company. Irrespective of if a stock should or should not trade at a given price level, price reflects the market’s current fair value viewpoint from a buyer and seller’s perspective.

One oft-cited price metric is the moving average, or a calculation of the average price level over a given time period. For example, the 50-day moving average calculates the average price level of an asset over the past 50 trading days, using each daily price observation and calculating a rolling average price. As we move forward from one trading day to the next, the moving average drops off what is now the 51st price observation and incorporates the new day’s average.

In looking at Table 4, you can see the percentage of stocks within select indices that were trading above their 50-day moving averages at two periods: March 23 (as noted above, hopefully, the equity market lows seen over two months ago), and Wednesday, May 27.

Table 4: Select Equity Index 50 Day Moving Average Statistics: March 23, 2020 and May 27, 2020

Representative Index

% of Stocks Above 50 Day Moving Average on March 23, 2020

% of Stocks Above 50 Day Moving Average on May 27, 2020

U.S. Large-Capitalization Stocks:

S&P 500

1.2%

94.8%

U.S. Small-Capitalization Stocks:

Russell 2000

2.8%

91.6%

European Stocks:

EURO STOXX 50

0.0%

96.0%

Japanese Stocks:

Nikkei

2.7%

95.6%

Emerging Market Stocks:

MSCI Emerging Markets

4.6%

63.6%

Source: U.S. Bank Asset Management Group Research, Bloomberg.

While a 50-day moving average is a relatively short period of time, the above table reflects the market decline’s depth and breadth across geographies and capitalizations.

So where does this leave us? Despite the recent surge in performance, current prices for the referenced indexes remain well below their February highs. In recent weeks, we have emphasized a “glass half full” mantra, noting that while the global economy will need to endure significant repairs, prices had reflected a very dire outlook. Global economic datapoints remain mixed, with signals from the labor market, transportation statistics and survey data suggesting that the worst may be behind us.

However, recent equity market movements anticipate a sharp recovery in some industries that could remain challenged as we gauge restart activity, consumer and business spending trends. Further, virus resurgence risks are also important considerations as we await further medical breakthroughs. We do not anticipate a widely-available vaccine for months, and many companies and consumers may remain cautious about resuming past activities until we see more definitive data on virus containment.

Very recent price appreciation hints at more of a fear of missing out (colloquially known as FOMO) on sectors and geographies deeply impacted during selling pressure versus business fundamentals supporting such moves. As such, we would not be surprised to see some modest pullbacks in recent strong performers. Keep in mind that markets are supposed to be forward-discounting mechanisms, anticipating future outcomes rather than reflecting current conditions. The path forward will likely have its fits and starts, but we continue to recommend a glass-half-full posturing and are steadfast in our belief that patient investors will be rewarded for the risks they bear.

Please don’t hesitate if we can help answer any specific questions you may have. Thank you for your trust.

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Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index and is representative of the U.S. small capitalization securities market. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe and is a subset of the Russell 1000 Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The MSCI EAFE Index includes approximately 1,000 companies representing the stock markets of 21 countries in Europe, Australasia and the Far East (EAFE). The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. The Nikkei 225 Stock Average is a price-weighted index comprised of Japan’s top 225 blue-chip companies on the Tokyo stock exchange. The Euro STOXX 50 Index is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations.

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