Are we getting ahead of ourselves?
It’s hard to keep up with the performance of the broad-based market indices, and since the month-end performance reports which are presented here were run the performance keeps coming. The broad-based indices have rallied as much as 40% off their March 23 lows at this point. The Federal Reserve’s actions kicked off the recovery and what appears to be continued good news about the economy’s re-opening post the Covid-19 shutdown propelled it higher. And the latest events surrounding the incident in Minneapolis have not seemed to provide any impediment either, although that is consistent with the markets' historical relationship with national political strife.
Some other recent trends have also continued, with Value and Small Size Equities at least keeping pace with the market cap-weighted indices' recovery, after they were down significantly more than the broader indices at the market lows. That still left Value and Size, across geographies, lagging the Growth and Large Cap sectors by anywhere from over 5% to as much as 30% on a year-to-date basis. And the relative performance story for non-US Developed and Emerging Market Equities was mixed on the month, with non-US Developed Markets outperforming Emerging Markets by just over 2%.
These divergences in performance have generated a lot of debate among the market “intelligentsia”. There have been a number of articles written about how historically cheap the Value and Small Size sectors have become. But after every article like those that have been written over the last few years, the sectors just got cheaper. And the extremes on the other end of the equation persist as well, with Technology stocks making up over 20% of the market cap of the S&P 500, a proportion which we have mentioned before and which has continued to grow.
On absolute markets levels, many market participants believe that performance has far exceeded fundamentals, especially since no one can accurately predict the long-term impact of the Covid-19 effects. So, while we can likely expect more market volatility in the near future, we are due to rebalance portfolios at the end of June and, away from any adjustments made in that regular process, we will continue to argue to stay the course and stay invested. We did not see one pundit accurately predict the strength or speed of this comeback in the markets and that is one point that should stick with all of us in terms of the ability of anyone to predict and/or time market moves, i.e. almost no one can.
Our Fixed Income allocations this month all benefited from a continued tightening of credit spreads as Federal Reserve liquidity and acquisition programs, which began last week with the purchase of Fixed Income Exchange Traded Funds. Like the Equity markets, many professionals believe that Credit markets have gotten ahead of fundamentals in terms of performance. In the Investment Grade universe, this has been in the face of massive bond issuance, as companies with favorable credit ratings have been raising funds to shore up their capital positions in the face of the Covid-19 crisis. Over $1.2 trillion has been raised in Investment Grade Corporate Credit so far in 2020, almost exceeding the all-time high issuance year of 2017 – and it is still only early June!
Source: Morningstar
