Stocks climbed higher last month, extending the rally that began after the March crash. Stock indices surmounted significant thresholds by the end of the month, with the S&P 500 crossing the 3000 mark and the Nasdaq going into positive territory for the year. Better than feared economic news, easing of lockdown measures and promising news of a potential vaccine continued to feed the market narrative that we will see a bounceback to a full recovery and drove the rally to new post-pandemic highs by month’s end.
Stock markets began May with positive momentum, though investors had significant uncertainty how long the rally could continue. News and data released throughout the month showed a massive degradation of the economy, but largely turned out better than feared. Unemployment jumped to 14.7%, its highest level since the Great Depression, and yet was not as bad as many economists expected. Consumer confidence saw a slight turnaround, reflecting expectations that the economy has a clear path towards recovery. This recovery narrative was also supported by a steady march of reopening efforts, which had begun in all 50 states by the end of May. Positive reports around development of a COVID-19 vaccine also kept up expectations for an aggressive rebound.
Even with the economic data beating expectations, the movement of the market remains volatile and out of sync with economic reality. While there is a possibility of a complete recovery, the market seems willing to ignore any other potential outcome. A great deal of uncertainty and huge risks still underlie the very fragile recovery; a resurgence of the virus or increasing trade tensions with China could knock the economy down again. A nearly 6% dip in stocks in mid-May even belies the fact that sentiment can easily turn without notice.
For now, indications seem to be that the economic recovery is continuing at a strong pace. It is important to note, however, that current market levels are being manipulated by abnormally high amounts of speculation due to the unprecedented situation. The market has calmed down and climbed steadily since the crash, but there will certainly be a lot of volatility in the weeks and months to come, and we must not mistake the market performance to be predictive of the economic situation.
The unpredictable volatility in markets pose some challenges for our trading strategy in May. Unfortunately, some missteps as we attempted to refine our risk management and market analysis led to some losses when the market whipsawed violently in the middle of the month. We were able to make up some of this deficit, but not all, leaving us at a small loss for May.
Going into May, we had expected to see some signs of selling pressure to offset the market rally and begin defining a trading range. Without a balance between the buying and selling sides of the market, it is difficult to get a sense of fair market valuation and establish a trading range. The market’s sharp drop and immediate rebound in the middle of the month is one of the consequences of this imbalance in buying and selling pressures. Without well defined support, the market reacts violently to news, data, or even without an obvious trigger.
Due to the continuing uncertainty, we traded with very short time horizons to limit our risk, and continued to see consistent success with these methods through the first half of the month. This mid-month selloff coincided with what we thought to be the market top, and we interpreted the action as the start of a more significant pullback. This quickly turned out not to be the case and we took losses as the market bounced to new post-pandemic highs.
*Incentive fee is calculated at twenty percent based on the difference of the high watermark and ending account balance for the Incentive Allocation period.