Stocks opened this week under pressure following an impressive 30% gain for the S&P 500 Index INDEXSP: .INX off its early March lows.
The rally for the S&P 500 appears to have run out of steam after reaching 2875 – a level that has been tested from both sides multiple times over the past 2+ years.
As discussed in last week’s market commentary, the run-up in the S&P 500 outpaced the improvements seen beneath the surface.
This week has provided a crash course in some of the differences between stocks and commodities, particularly the need to take delivery when commodity contracts settle.
With oil demand collapsing, storage facilities are filling up and oil prices are coming under pressure. What began as specific issue for the May contracts has not dissipated as that contract settled.
While oil supply is expected to be reduced, it does little more than offset the drop in demand that has already been seen.
Meanwhile the glut of oil in the market puts downward pressure on price and could have broader spillover effects (both within the industry and across the financial markets).
While volatility in the oil market has garnered many of the headlines so far this week, we are also keeping an eye on copper prices and bond yields. Even as stocks rallied on good news from a monetary and fiscal stimulus perspective and were aided by positive developments in the fight against the coronavirus, economic conditions simmered on the back burner.
This week’s drop in bond yields and weakness in both copper and oil prices suggest the stock market’s focus will turn more squarely on the economic challenges that lay ahead.
The Bottom line: Volatility has remained elevated and it is spreading into economically sensitive areas of the financial markets. Stocks will eventually look past economic weakness and focus on the prospect of improving conditions.
Without the support of higher bond yields and commodity prices doing so at this point appears premature. Our weight of the evidence (updated Tuesday) remains neutral.
Twitter: @WillieDelwiche
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
