Wealth Management — November 2, 2020
What Happened in the Markets?
- US stocks traded higher Monday as the S&P 500 rose 1.2% to close at 3,310. With the rally, the index is now up 2.5% on the year to date.
- After recording its worst week since March last week, the S&P 500 bounced back on Monday, kicking off a week that will be full of potentially market-moving events. While Tuesday's election and subsequent results will dominate attention, Thursday's Federal Reserve announcement, Friday's October jobs report and a host of corporate earnings results this week all have the potential to impact markets. While perhaps difficult to pinpoint a specific catalyst for Monday's rally given all of the headlines in play, a resoundingly strong ISM manufacturing print this morning likely contributed to the boost in sentiment.
- All 11 S&P 500 sectors were higher, with Energy (+3.7%) and Materials (+3.4%) outperforming the broader market, while Consumer Discretionary (+0.3%) and Communication Services(+0.1%) lagged.
- Rates were mixed across the curve, with the 10-year Treasury rate falling to 0.85% as of the 4 p.m. equity market close, while 2-year rates were slightly higher. Gold was 0.9% higher, while WTI oil also moved higher to $37 per barrel; the US dollar strengthened modestly in the trading session, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks traded higher on Monday as the S&P 500 gained 1.2%. Markets rebounded to start the week after falling four of the past five sessions as well as experiencing the worst week since March with last week's 5.6% decline. While last week much of investor focus was fixated on the increase in COVID-19 cases and re-implementation of lockdowns in parts of Europe, this week focus will shift toward the Presidential election results Tuesday night, as well as various earnings and economic data coming out throughout the week. On the data front, Monday's ISM Manufacturing release came in well ahead of expectations, with the monthly reading coming in at 59.3, well ahead of the 55.8 consensus forecast, and good for the highest ISM print in more than two years. Strong manufacturing sentiment builds on last week's constructive 3Q GDP report, and is another recent data release that points to a recovering economy. The backdrop of strengthening fundamentals may help markets navigate what is likely to be a volatile week as political uncertainty remains elevated ahead of this week's election. Looking ahead, aside from election results, markets will also digest the November FOMC announcement on Thursday, as well as the October non-farm payrolls report due out Friday morning.
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.