May 5th: Markets climb as states reopen and oil surges 20%

Stocks continue their positive start to the week as the economy continues to re-open and oil prices pick up amidst demand returning. Also: Why does the Nasdaq continue to outperform?

Tuesday by the numbers

S&P 500: +0.9%

Dow: +0.56%

Nasdaq: +1.09%

Markets continued to recoup the losses from the end of last week as investors remained positive on various states reopening, whilst oil staged a comeback as WTI – the US oil benchmark - surged 20% as demand starts to show signs of life following the global lockdown. Although markets gave back much of their gains going into the close, at one point the Nasdaq traded at less than 1% from its 2020 highs – something even the most bullish investor would not have predicted 6 weeks ago.

Why is it then that despite the worst pandemic of most of our lifetime, with millions of American’s out of jobs and an economy in a free-fall, that the stock market have made such an incredible recovery?

• Increased liquidity by the Federal Reserve. Companies are being given cash to keep the lights on by the government who are buying the debt of companies in trouble…

• Zero cash rates and low bond yields: Investors who are sitting on cash or invested in bonds are getting little to no return and so stocks are a much more attractive alternative

• Investors as a whole are still underweight equities: Many financial institutions are not as invested in the stock market as they were before the pandemic, so as they gain back confidence and start to invest back in, the market continues to rise…

• Relaxation of lockdowns and bottoming of expectations: Markets are always said to improve before the economy does (they are forward looking after all), so with states and countries being opened back up, investors start to feel comfortable that the worst is now behind them and feel comfortable to invest again

So why is it that the Nasdaq (black line) has performed so well this year and continues to outperform the S&P 500 (green line)? Well this has actually been happening for the last 10 years and is down to a few things, but firstly, here is a quick overview of how the two indices differ:

• The S&P 500 index is comprised of the 500 largest publicly-listed companies in the US across all industries. It is therefore often perceived as the best overall representation of the US stock market

• The Nasdaq 100 index is composed of 103 non-financial stocks consisting mainly of technology (57%), consumer services (22%) and Healthcare (7%)

Now the following reasons will help explain why we have seen this outperformance and the Nasdaq continues to lead the market higher:

• The technology sector. Including the likes of Microsoft, Netflix and Amazon, the sector is not only able to deal with the pandemic more easily than other companies, but in many cases is even able to benefit from our need to stay and work from home.

• No exposure to energy, financial services and real estate. These industries are highly impacted by a weak US consumer and the least capable to thrive - or even survive - economic downturns, and the Nasdaq has no exposure to these at all

• Technology and Healthcare seen as safer investments. Before the crisis, investors chased after tech and healthcare stocks for their exciting growth, innovation and ability to deal with the future. As investors have started to feel comfortable investing again, many see these names as not only best equipped to deal with the future, but also the ones best capable to weather the coronavirus storm.

The question as to whether this trend will continue, at least over the coming months, remains to be seen. Perhaps the value will becomes less attractive in these tech and healthcare names as they continue to rally and investors will instead bet on the beaten up stocks such as financial services, leisure and retail as things start to reopen and return to whatever this new normal will look like. In the meantime, we can look forward to earnings from General Motors, CVS and Disney before the release of the likely-ugly ADP data showing private-sector job losses for April.