Wealth Management —August 12, 2020
- US stocks traded higher on Wednesday as the S&P 500 rose 1.4% to close at 3,380. With the rally, the index is now up 4.6% year to date, and closed just shy of the February 19 all-time high at 3,386.
- After a late-afternoon sell-off on Tuesday ended a seven-day string of gains, stocks resumed their upward trajectory on Wednesday. There was no clear catalyst for the bounce, as was the case with yesterday’s decline, but sectors that underperformed yesterday, such as Information Technology and Health Care, helped drive the market higher today. While it has been a light week in reference to earnings and economic data releases, this morning’s CPI numbers surprised to the upside, with core CPI showing a 1.7% year-over-year increase versus the consensus estimate of 1.1%. Investor focus continues to remain on Washington D.C., where little progress has been announced as it relates to negotiations over another round of fiscal stimulus.
- Ten of the 11 S&P 500 sectors were higher, with Information Technology (+2.3%) and Health Care (+1.7%) leading the broader market, while Industrials (+0.4%) and Financials (-0.3%) lagged.
- Rates were higher across the curve, with the 10-year Treasury rate rising to 0.67% as of the 4 p.m. equity market close. Gold prices finished virtually flat on the day while WTI oil rose to just below $43 per barrel; the US dollar weakened modestly in the trading session, as measured by the US Dollar Index.
US stocks rallied on Wednesday, with the S&P 500 gaining 1.4% to close at 3,380. Wednesday’s rally marks the eighth session higher in the past nine for the S&P 500, and the recent surge puts the index just 6 points shy of the all-time closing high at 3,386 from February 19. While there was no clear catalyst for Wednesday’s rally, just as there appeared no obvious catalyst for the prior day’s reversal, Wednesday’s market action largely reflected a reversal of the prior day’s moves—the S&P 500 snapped back with Tuesday’s leading sectors lagging on Wednesday and vice versa, while gold prices, which had come under pressure on Tuesday, stabilized in Wednesday’s trading. One move consistent across Tuesday and Wednesday’s trading was upward pressure on bond yields, with the 10-year Treasury yield climbing in each day of trading this week—the 0.67% 10-year yield as of the 4 p.m. equity market close marks the highest level for yields in more than a month.
With the recent rally, the S&P 500 is now re-testing the all-time high set earlier this year, with the NASDAQ composite having already traded to a new all-time high in recent weeks. The year 2020 has now seen both a dramatic bear market and a subsequent V-shaped market recovery. While markets corrected sharply this spring as the COVID-19 pandemic drove the US and global economies into recession, stocks have bounced back almost as rapidly, as markets look to what could be an economic recovery in the second half of 2020. While the health crisis has wreaked havoc on the economy and driven a near-unprecedented spike in unemployment, policymakers have reacted, and record levels of stimulus should help ease the burden the current crisis is putting on households, businesses and the economy at large. A one-two punch of monetary and fiscal policy is being delivered in the US, as policy makers confront the current economic challenges. US policymakers have acted aggressively to address the challenges posed to the economy, and ultimately this policy response should help drive an economic recovery once the current health crisis is resolved. Early signs of that potential recovery appear to be at hand, with green shoots apparent in the recent economic data.
Over the past few months, the S&P 500 has traversed two-and-a-half distinct market phases. The first phase fully discounted the sudden-stop COVID-19 lockdown recession from February 19-March 23 in a -34% bear market drawdown. Second, was the repair phase, which was dominated by “do whatever it takes” and outsized policy moves by both the Federal Reserve and Congress where stimulus totaled almost 47% of GDP and was accompanied by a nearly 60% retracement of the sell-off from March 24-April 30. And, finally the current early innings of the recovery phase, which has been characterized by the faster-than-expected reopening of the economy, has recently allowed the index to surge through 3,000 and its 200-, 100- and 50-day moving averages. Although the GIC has been looking for a V-shaped recovery and a decisive shift in market leadership that has accompanied recessions in the past, and we have been well positioned for recent rotations toward small caps, value style, international stocks and cyclicals like Financials, we acknowledge that the market has moved very far, very fast. With some of the easy money having been made off the trough, we think markets remain range-bound for the next 3-6 months as the twists and turns of this particular recession with its dependency on the virus trajectory and the true pace of full economic reopening likely to be opaque and lumpy. In this environment, we are very focused on active security selection with an eye toward valuations and risk premiums in both US stocks and corporate credit. The richness, crowdedness and concentration of the S&P 500 Index, along with our belief that US Treasuries are unattractive and that the US dollar is ultimately poised to weaken, has us also pursuing high levels of asset class diversification with above-average exposures to SMID stocks, international equities and commodities.
Market data provided by Bloomberg.
Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.
NASDAQ Composite Index: A broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market.
S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
US Trade-Weighted Dollar Index: A weighted average of the foreign exchange value of the US dollar against a subset of the broad index currencies that circulate widely outside the US.