Jason Gunkel, CFP®, CFA, CAP®, Chief Investment Officer
May 1, 2020
The U.S. stock market (represented by the S&P 500 Index) just had its best performance in April for a single month since January 1987, returning almost 13%. The rally was welcomed by investors after the market had its worst month in March since October 2008, falling 12.5%. That puts the S&P 500 down about 9% for the year to date as of the end of Thursday.
It is important to note that the market rally in April was largely driven by technology stocks. Five giant technology companies, Microsoft, Apple, Amazon, Google, and Facebook now make up about 20% of the total value of the 500 companies in the S&P 500 Index. These companies have averaged a year-to-date positive return of almost 10%. We feel they have done much better than the overall market because of their strong balance sheets and their businesses are seen as benefiting in various ways from the stay-at-home orders.
The market rally has been fueled by optimism that the economy has started to show signs of slowly reopening. Federal guidelines encouraging people to refrain from most public activities expired on Thursday. Restaurants and shopping malls across the country partially opened today after governors in several states planned to allow stay-at-home orders to expire.
The market also got a boost last week after Congress passed another bill to help small businesses. Congress initially provided about $350 billion in loans and grants to businesses affected by COVID-19, which was used up in about a week. Last week, Congress passed a bill that provided an additional $310 billion for loan programs to assist businesses.
Although the stock market has rallied, the unemployment rate continues to rise. Another 3.8 million people filed for unemployment insurance last week according to the U.S. Department of Labor. Over the last six weeks, over 30 million people have filed for unemployment benefits.
Estimates for how much the economy will shrink this year have been very pessimistic. For example, according to an article in the New York Times, economists with J.P. Morgan believe that the U.S. GDP will fall at a 40 percent annual rate in the second quarter!
While the economy could continue to suffer, the stock market tends to rebound before the economy starts to recover. Investors buy shares of companies based on expectations for what will happen in the future. For example, during the last recession, the stock market bottomed in March 2009, but the unemployment rate didn’t begin to drop until October of that year, according to the U.S. Department of Labor. We don’t know if the stock market already reached its bottom in March, (many experts are saying this is unlikely) but we can hope.
For now, we can celebrate that the stock market has turned optimistic, much like people across the country, as we start to see some light at the end of the tunnel.