The 1% Move Report

Wealth Management — November 12, 2020

• US stocks traded lower Thursday as the S&P 500 fell 1.0% to close at 3,537. With the sell-off, the index is up 9.5% year to date.
• Equity markets have alternated between gains and losses so far this week, as constructive vaccine news on Monday helped lift equities, but follow-through of Monday's rally has been mostly absent throughout the rest of the week to date. With daily new confirmed cases of COVID-19 in the US continuing to climb in recent days, concerns may be growing with regard to the impact this second wave of COVID-19 could have on markets and/or the economy. However, it should also be noted that with the S&P 500 coming on the heels of its best week since March and a further 3%+ surge on Monday's open, markets had also become extended and were likely susceptible to some consolidation regardless of catalysts.
• All 11 S&P 500 sectors were lower, with Consumer Staples (-0.2%) and Health Care (-0.4%) outperforming the broader market, while Materials (-2.2%) and Energy (-3.4%) lagged.
• Rates were lower across the curve, with the 10-year Treasury falling to 0.88% as of the 4 p.m. equity market close. Gold was 0.6% higher, while WTI oil edged slightly lower to $41 per barrel; the US dollar weakened modestly in the trading session, as measured by the US Dollar Index.

US stocks traded lower on Thursday as the S&P 500 fell 1.0%. The index has alternated between gains and losses this week, with a strong rally Monday morning following positive vaccine data having seen little follow-through the rest of the week. Still, the S&P 500 is on track to end the week in the green ahead of Friday's trading, with the index up 0.8% on the week to date; not a bad follow-up to last week's 7%+ rally. There was no obvious catalyst to point to for Thursday's decline, though perhaps no catalyst was needed with the recent surge in stock prices leaving equity markets extended and susceptible to consolidation. That said, with the US setting new records in terms of daily confirmed COVID-19 cases this week, it's possible that concerns are growing over the impact this 'second wave' could have on markets and the economy. Partial lockdowns have been re-instated across much of Europe, and several regional leaders in the US have also rolled back certain re-opening measures as cases climb. Thursday's market leadership was defensive with cyclical sectors lagging, while Treasuries and gold rallied. While the S&P 500 did end the day lower, a late-session rally did see the index close well off of its session lows.

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.