Wealth Management — July 29, 2020
- US stocks traded higher on Wednesday as the S&P 500 rose 1.2% to close at 3,258. With the rally, the index is now up 0.9% year to date and has fell 3.8% from the February 19 all-time high.
- After two relatively quiet days in the markets amid the busiest week of 2Q earnings season, US equities surged on Wednesday as markets digested earnings, the FOMC meeting and a congressional hearing focused on large technology companies. While the latter two events were closely watched by market participants, neither appeared to produce the type of market-moving headlines some may have expected, and perhaps that was enough for markets to trade higher on Wednesday. Focus will remain on the Tech sector in the coming days with several of the largest US technology and internet companies scheduled to report results after the bell Thursday.
- All 11 S&P 500 sectors were higher, with Energy (+2.1%) and Financials (+2.0%) leading the broader market, while Utilities (+0.4%) and Consumer Staples (+0.2%) lagged.
- Rates were mixed across the curve, with the 10-year Treasury rate falling to 0.57% as of the 4 pm equity market close. Gold prices rose 0.6% while WTI oil rose to slightly over $41 per barrel; the US dollar weakened modestly on the day, as measured by the US Dollar Index.
US stocks rallied on Wednesday, with the S&P 500 gaining 1.2%. There was much for markets to digest on Wednesday, with a busy earnings calendar, the FOMC announcement, and a much anticipated congressional hearing focused on large technology companies. Ahead of the afternoon’s events, stocks opened higher Wednesday morning and steadily rallied throughout the session. Wednesday afternoon’s FOMC announcement went largely as expected with the Fed holding policy rates at zero while pledging to continue to provide accommodative monetary policy given the elevated uncertainty and risks facing the US economy today. As of the 4 p.m. equity market close the congressional tech hearings were ongoing, but like the FOMC announcement, there appeared to be few market-moving headlines out of the event. Perhaps a lack of such headlines was welcomed by tech investors as the sector outperformed on the day on the back of several strong earnings reports overnight and ahead of Thursday afternoon’s scheduled results from several large tech companies. While tech and the Fed were in focus today, attention remains elsewhere in Washington D.C., as markets continue to watch negotiations play out as Democrats and Republicans debate another round of fiscal stimulus.
With today’s rally, the S&P 500 is down just 3.8% from its all-time high of 3,386 on February 19. After falling 20% in the first quarter of 2020—the worst quarter for the index since 4Q 2008—the S&P 500 finished the second quarter having rallied back 20%—the strongest quarter for the index since 4Q 1998. 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.