Wealth Management — December 1, 2020
What Happened in the Markets?
- US stocks traded higher Tuesday as the S&P 500 rose 1.1% to close at 3,662. With the rally, the index is now up 13.4% year to date.
- With Tuesday's rally, the S&P 500 closed at a fresh all-time high, recovering the prior day's modest sell-off. Futures pointed higher overnight and gains were maintained throughout the session as strong economic data releases buoyed sentiment. More positive vaccine news overseas also likely aided Tuesday's rally, and speculation over a potential stimulus deal following several announcements from lawmakers in Washington D.C. was also in focus. While equities rallied modestly to begin December, Treasury markets saw even more pronounced action as a sell-off in the long end of the curve saw 10-year Treasury yields settle near their highest level in more than three weeks.
- Ten of the 11 S&P 500 sectors were higher, with Communication Services (+2.0%) and Financials (+1.6%) outperforming the broader market, while Energy (+0.4%) and Industrials (-0.2%) lagged.
- Rates were higher across the curve, with the 10-year Treasury yield rising to 0.92% as of the 4 p.m. equity market close. The yield curve steepened, as 10-year rates rose more than 2-year rates. Gold was 2.1% higher, while WTI oil moved lower to just below $45 per barrel. The US dollar weakened modestly in the trading session, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks traded higher on Tuesday as the S&P 500 gained 1.1%. Tuesday's rally saw the S&P 500 close at a new high for the 27th time this year, as equity markets build on last month's momentum to begin December. Globally, equities traded higher overnight, setting the tone for a strong US session. China posted its strongest manufacturing PMI data in a decade, lifting Asian equities, and Europe beneﬁted as a vaccine candidate ofﬁcially ﬁled for European authorization. During the US session, a strong, albeit slightly weaker-than-expected, ISM Manufacturing print was enough to maintain gains throughout the session. While participation was fairly wide, technology and internet-related stocks were among the biggest leaders on the day, and ﬁnancials also outperformed. With the strength in tech, the NASDAQ 100 closed at a new all-time high for the ﬁrst time since September. While equity markets continued their recent climb, Treasury markets saw notable weakness on Tuesday as long- end yields climbed sharply with the 10-year Treasury yield settling near 0.92%, its highest level in three weeks. The move in Treasuries comes as speculation again heats up over renewed ﬁscal stimulus negotiations in Washington D.C. with lawmakers from both sides of the aisle offering comments Tuesday surrounding the need for more stimulus in the near term. Looking ahead, economic data will be in focus through the remainder of the week, with Wednesday's ADP employment change report, Thursday's services PMI print and Friday's nonfarm payrolls report.
The Global Investment Committee’s Outlook
Over the past several 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.