The 1% Move Report

Wealth Management — June 24, 2020

• US stocks traded sharply lower on Wednesday as the S&P 500 fell 2.6% to close at 3,050. With the sell-off, the index is now down 5.6% year to date and has corrected 9.9% from the February 19 all-time high.
• There were several headlines to point for Wednesday’s turn in sentiment, with trade concerns and an uptick in Covid-19 cases in several parts of the US likely contributing to the sell-off. Stocks opened lower this morning, following reports overnight that US trade officials were weighing new sanctions on a slew of European imports, re-igniting concerns that trade tensions could rise on multiple fronts in the weeks ahead. Domestically, growing concerns around rising Covid-19 cases in several US states appeared to weigh on the market. While poor news flow Wednesday likely drove the sell-off, some consolidation in markets may already have been due, given the extent of recent gains in some parts of the market.
• All 11 S&P 500 sectors were lower, with Utilities (-0.9%) and Consumer Staples (-1.6%) outperforming the broader market, while Energy (-5.5%) and Financials (-3.5%) lagged.
• Rates were lower across the curve, with the 10-year falling to 0.68% as of the 4 p.m. equity close. The yield curve flattened, as 10-year rates fell more than 2-year rates. WTI oil fell over 5% to just under $38 per barrel, while gold fell slightly, trading at $1,760 per ounce. The US dollar was modestly higher, as measured by the US Dollar Index.

US stocks fell sharply on Wednesday as the S&P 500 lost 2.6%. Wednesday’s decline marks the worst day for the index in nearly two weeks, echoing the 6% sell-off seen on June 11. Then, much like today, there was no obvious single factor driving the market’s concern, though there were several headlines to point to as potential culprits on Wednesday. Stocks were poised to open lower this morning following reports overnight that US trade officials were weighing new tariffs on several categories of European imports. This news comes just hours following reports that EU officials were considering blocking American travelers to the continent even after borders are opened more broadly next month, citing concerns that the coronavirus pandemic has not yet been contained in the US. The potential for rising trade tensions globally has been in focus this week, following comments around the US-China trade deal from White House officials earlier this week, and Wednesday’s news would appear to raise questions about whether US-EU trade tensions could also pose headwinds to a potential economic recovery in the coming months. 

On the domestic front, rising Covid-19 cases in several states also likely weighed on the market Wednesday. While markets have reacted little to the growing number of new cases that have emerged in states such as Arizona, Texas, Florida, and California in recent weeks, Wednesday saw several troubling headlines that perhaps drove a change in market sentiment. Florida and California both saw their highest single-day growth in new confirmed cases since the pandemic began. In Houston, Texas, it was reported that traditional intensive-care unit capacity was close to being fully utilized by Covid-19 patients, though it is important to note additional capacity has been developed and remains available to deal with a surge in patients as part of the pandemic planning in recent months. As new case growth rises in some parts of the country, governors of New York, New Jersey and Connecticut announced on Wednesday that they would mandate travelers to their states from “hot spots” around the country to self-quarantine for 14 days upon arrival. While there may be growing angst around a resurgence in Covid-19 case growth, the likelihood of broad lockdowns in response remains low, and as a result, while Wednesday’s headlines are certainly troubling and warrant watching, they do not yet appear to be on the scale that would derail the economic recovery that appears to be taking shape as much of the US and global economies “re-open.”

While trade and pandemic concerns likely contributed to Wednesday’s weakness, an equity market pause may already have been due, given the extent of recent strength in some parts of the equity market. To wit, Wednesday’s slide breaks an 8-day winning streak for the NASDAQ composite, a streak that saw the index close back above 10,000 at a new all-time high just yesterday. In fact, Wednesday marked just the third down day for the NASDAQ this month. While recent economic data offers reason for optimism that a recovery may be taking hold following what was a deep recession in the first half of 2020, clearly there has been some exuberance in markets, and Wednesday’s pause may reflect that some recalibration of sentiment was warranted near term.

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.