Wealth Management —November 3, 2020
- US stocks traded sharply higher Tuesday as the S&P 500 rose 1.8% to close at 3,369. With the rally, the index is now up 4.3% on the year to date.
- The S&P 500 has had back-to-back rallies as it looks to recover from last week's nearly 6% decline. Little obvious news to point to for today's rally, though expect markets to remain volatile in the days ahead as they digest results from Tuesday's US election. Outside of the political calendar, there is plenty to focus on this week with the November FOMC decision on Thursday, the October jobs report on Friday, and a host of corporate earnings results scheduled throughout the week.
- Ten of the 11 S&P 500 sectors were higher, with Industrials (+2.9%) and Financials (+2.2%) outperforming the broader market, while Communication Services (+1.4%) and Energy (-0.8%) lagged.
- Rates were higher across the curve, with the 10-year Treasury rate rising to 0.89% as of the 4 p.m. equity market close. Gold was 0.6% higher, while WTI oil also moved higher to nearly $38 per barrel; the US dollar weakened modestly in the trading session, as measured by the US Dollar Index.
US stocks traded higher on Tuesday as the S&P 500 gained 1.8%. After a 5.6% weekly decline last week for the S&P 500--the largest weekly loss since March--markets have started an event-packed week with two straight days of 1%+ gains. Alongside the move higher in equities, Treasury yields have also climbed, with the 10-year Treasury rate touching 5-month highs in Tuesday's trading. While Monday's rally seemed driven, in part, by better-than-expected economic data, there were few obvious catalysts to point to for Tuesday's move, though attention is likely focused on the election with results scheduled to begin trickling in Tuesday evening. Given the unique circumstances of voting in a pandemic, it may take longer for votes to be counted and the results of this election to be known than in years past. Delayed results could be a contributor to volatility in the days ahead, though markets are likely already pricing this in to some extent. Contrastingly, with many expecting the delayed decision scenario, should results be apparent sooner than anticipated, it is possible markets could rally regardless of the outcome as uncertainty dissipates. While politics and elections may drive volatility in the near term, the business cycle and fundamentals have been more important drivers of market returns historically. To that extent, a busy week for fundamental data continues this week with 3Q corporate earnings season, the FOMC on deck Thursday, and the October non-farm payrolls report Friday.
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.