Wealth Management — November 9, 2020
- US stocks traded higher Monday as the S&P 500 rose 1.2% to close at 3,551. With the rally, the index is now up 9.9% on the year to date.
- Stocks built on last week's momentum, with Monday's surge sending the S&P 500 to a new intra-day all-time high, though a late-session slide did see the index fall below the early September closing high. Futures were pointing higher overnight on the back of several media outlets calling the Presidential election over the weekend, and those overnight gains received a sharp boost early Monday morning following the release of better-than-expected initial vaccine efficacy data from a major pharmaceutical company. Markets responded with jubilance to the vaccine update, with cyclical sectors most levered to a normalization in activity sharply outperforming on the session, while Treasury yields jumped to the highest levels in five months.
- Seven of the 11 S&P 500 sectors were higher, with Energy (+14.2%) and Financials (+8.2%) outperforming the broader market, while Information Technology (-0.7%) and Consumer Discretionary (-1.6%) lagged.
- Rates were higher across the curve, with the 10-year Treasury rising to 0.93% as of the 4 p.m. equity market close. The yield curve steepened, as 10-year rates moved higher than 2-year rates. Gold was 4.3% lower, while WTI oil surged 8% to $40 per barrel; the US dollar strengthened modestly in the trading session, as measured by the US Dollar Index.
US stocks traded higher on Monday as the S&P 500 gained 1.2%. With Monday's rally, the S&P 500 traded to a new intra-day all-time high, but a late-session slide did see the index fall below the early September closing highs. Two main factors appeared to drive Monday's sharp gains: 1) reduced uncertainty surrounding the election with several of the major media outlets calling the Presidential election over the weekend; and 2) much better-than-expected initial vaccine efficacy data released by a large pharmaceutical company Monday morning. On the latter point, data released early Monday showed the vaccine being tested had a better than 90% efficacy rate in preventing COVID-19 infection, considerably better than the 60%-70% many experts had been expecting. This positive vaccine news drove a "re-opening" trade across markets, with stocks surging higher, led by cyclical sectors that stand the most to gain from a normalization in activity. In bond markets, yields moved sharply higher following the vaccine update, with the 10-year Treasury yield moving to its highest level since early June. While re-opening and recovery stocks surged on Tuesday, many of the year-to-date leaders that have benefitted from recent trends came under pressure; underscoring this point, the NASDAQ 100, which had been up nearly 40% year to date coming into the week, actually ended Monday more than 2% lower. It should also be noted for the most part stocks put in their highs for the session in the first half hour of trading Monday, with the S&P 500 closing near its low for the day, albeit still up more than 1%.
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.