It was a great week for U.S. stocks which notched a second straight week of gains for the first time since February. Optimism spread over talks to begin reopening the economy and positive news on the health front from Gilead. Consumer Discretionary, Health Care, and Technology drove the rally while Financials, Real Estate, and Materials were down for the week. Interestingly, Friday staged a strong counter trend rally in some areas of the market that have been particularly beat up such as energy up over 10%, regional banks up 9%, broad financials up almost 6%, and industrials, materials, and small cap U.S. stocks all up around 4% on the day. The S&P 500 has now rebounded over 28% off the most recent low made March 23.

Weekly Returns

S&P 500: 2874.56 (+3.04%)
FTSE All-World ex-US (VEU): (+0.91%)
US 10 Year Treasury Yield: 0.65 (-0.08)
Gold: $1,683.34 (-0.32%)
EUR/USD: 1.0876 (-0.55%)

Major Events

• Monday – Oversupply concerns weighed on Oil, despite an agreement reached Sunday with OPEC and its allies to cut production by 9.7 million barrels per day.
• Tuesday – JPMorgan Chase and Well Fargo both fell 3% and 4% respectively after reporting earnings that drastically missed forecasts.
• Wednesday – U.S. retail sales for March fell 8.7% from a month earlier which was more than the expected 8% drop.
• Thursday – The Jobless claims report for last week came it at 5.245 million bringing the total jobless claims over the last four weeks to over 22 million.
• Thursday – President Trump announced a plan for a three-phased approach to open up the economy to serve as guidelines for States and local governments.
• Friday – Gilead jumped 8% Friday following a report that researchers from the University of Chicago Medicine said they saw “rapid recoveries” in 125 COVID-19 patients taking Gilead Sciences Inc.’s experimental drug Remdesivir as part of a clinical trial.

Our Take

The last few months of stock market action have been astonishing to say the least. U.S. stocks entered the fastest bear market in history, with the S&P 500 down 34% from its February 19 high to its March 23 low. Over the same timeframe, the equal weight S&P 500 index, which is the same constituents of the largest 500 companies, but weighted equally instead of market cap weighted like the S&P 500, was down nearly 40% as were U.S. small cap stocks.

If we look at the data a little differently by comparing the percentage off the high and include the three largest stocks in the S&P 500, we start to get a better picture of who has “recovered” and who has not. As of Friday’s, close, the S&P 500 is down about 15% off its high, while the equal weight proxy RSP is down over 21% and small cap is down 28%. The three largest company’s in the S&P 500 are Microsoft, Apple, and Amazon which combined make up over 15% of the index weighting! From their highs, Amazon is down about 1%, Microsoft is down about 5.5% and Apple is down about 13.5%.

Now pan out to a one-year time frame and the divergence is truly incredible. U.S. small cap stocks are down 21%, the equal weight S&P 500 is down 11% and the S&P 500 is up 1%. If you look at the returns of just these three stocks over one year, Microsoft is up nearly 50%, Apple is up almost 44%, and amazon is up almost 28%.

One-year total returns:

So, what does this tell us? The most obvious answer is that by simply looking at the S&P 500 we don’t get a true sense of the underlying breadth of the market. A handful of mega-cap growth stocks have been a key driving force behind S&P 500 returns and have been relatively unscathed in what has been a massive economic shock unlike anything we have ever experienced in history. Of course, some companies like these will fare much better than others, but it is hard to see a scenario where these companies are unaffected when a large portion of their customer base is consumers and small business. Cost also matters, and there are several unloved areas of the market that are much cheaper on a relative basis. We caution piling into what is most expensive, as although these trends can last for very long periods of time, we believe they will eventually reverse. Lastly, we are not insinuating we have a dotcom scenario here, but it is interesting to note that the ratio of the Nasdaq 100’s out performance over small cap has reached levels close to those of 1999.