Wealth Management — August 26, 2020
- US stocks traded higher on Wednesday as the S&P 500 rose 1.0% to close at 3,479. With the rally, the index is now up 7.7% year to date, and closed at a new all-time high.
- After closing at a new all-time high for the first time in six months last week, the momentum has continued this week with the S&P 500 rallying for three sessions in a row, with the index setting new record highs in each day of trading this week. Strong quarterly results from a large cloud/software company overnight helped send technology stocks sharply higher on Wednesday, leading the broader market; outside of tech and internet-related names, action was far more muted. Looking ahead, expect Federal Reserve policy to be in focus tomorrow, with Fed Chair Jerome Powell slated to speak at Thursday’s virtual Jackson Hole symposium.
- Six of the 11 S&P 500 sectors were higher, with Communication Services (+3.7%) and Information Technology (+2.1%) leading the broader market, while Utilities (-1.2%) and Energy (-2.2%) lagged.
- Rates were mixed across the curve, with the 10-year Treasury rate rising to 0.69% as of the 4 p.m. equity market close. Gold rose 1.3% to $1,953 per ounce, while WTI oil was flat on the session just above $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 1.0% to close at 3,479. After moving to a new all-time high last week as the S&P 500 fully recovered from the pandemic-induced bear market witnessed in 1Q20, momentum has continued this week with the index setting fresh record highs in each day of trading on the week to date. While index performance has been strong, breadth has narrowed, with fewer stocks participating in the rally; this was clearly evident on Wednesday, with five S&P sectors ending the day in the red despite the 1%+ index rally, and the small-cap Russell 2000 Index actually ending the session down 0.7%. Wednesday’s strength was largely isolated to technology and internet-related stocks, with strong quarterly results from a large cloud/software company Tuesday night boosting sentiment across the sector. In addition to weak breadth on Wednesday, the CBOE Volatility Index, or VIX, actually moved higher during the session, perhaps another sign that underneath the surface markets may be pricing more risk than new record highs for the index would suggest. Rates markets were relatively muted on Wednesday with 10-year rates edging slightly higher in trading ahead of Thursday’s keynote speech from Fed Chair Powell, during which the Fed is expected to unveil updates to its policy framework; expect rates markets to react to comments made at tomorrow’s virtual Jackson Hole symposium. In addition to the Fed, economic data will be in focus Thursday with the revised 2Q GDP report slated for release, along with weekly jobless claims and the July pending home sales report.
With the recent rally, the S&P 500 has traded to new all-time highs. 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 acted aggressively to address the challenges posed to the economy this spring, and ultimately this policy response has helped drive a recovery in the economic data in recent months. While green shoots are apparent, uncertainty remains high, and the pace of recovery going forward likely hinges on whether or not further fiscal stimulus measures are agreed to in Washington D.C.
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 to new all-time highs. 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.