Wealth Management — July 7, 2020
What Happened in the Markets?
- US stocks traded lower on Tuesday as the S&P 500 fell 1.1% to close at 3,145. With the sell-off, the index is now down 2.7% year to date and has corrected 7.1% from the February 19 all-time high.
- Tuesday’s decline snaps a five-day streak of positive sessions for the S&P 500, which had been the longest of 2020 to date. There was no clear catalyst for Tuesday’s decline, but perhaps none was needed as some consolidation may have been due following the recent string of gains. The S&P 500 opened modestly lower before rallying into positive territory midday, but a steady sell-off throughout the afternoon that accelerated in the final hour of trading left the index down more than 1% on the session.
- Ten of the 11 S&P 500 sectors were lower, with Consumer Staples (+1.0%) the only positive, while Financials (-2.1%) and Energy (-3.2%) lagged the broader market.
- Rates were mixed across the curve, with 10-year rates falling to 0.63% as of the 4 pm equity market close. Gold prices rallied 0.6% on the session to $1,797 per ounce, a nine-year high; the US dollar strengthened modestly on the day, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks declined on Tuesday, with the S&P 500 falling 1.1% to close at 3,145. Tuesday’s sell-off snaps a five-day streak of positive sessions for the S&P 500, the longest such streak so far this year. The S&P 500 had been in positive territory for the session midday, but an afternoon sell-off saw the index close down more than 1%. The NASDAQ 100 had briefly traded to a fresh all-time high during the session as well, before reversing lower to end the day in the red. There were few obvious catalysts to point to for Tuesday’s reversal, though perhaps some consolidation of recent gains was due, with the S&P 500 having traded nearly 6% higher over the past five trading days coming into Tuesday. Long-end Treasuries rallied alongside the weakness in equity markets, with 10-year rates falling to 0.63% during the session. In-line with the defensive nature of Tuesday’s trading, gold prices rallied to nine-year highs, just under $1,800 per ounce.
With today’s decline, the S&P 500 is now 7.1% below its previous 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 has now 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, policy makers 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 policy makers 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.
The Global Investment Committee’s Outlook
Over the past 90 days, 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.