The 1% Move Report

Wealth Management — October 19, 2020

•  US stocks traded lower on Monday as the S&P 500 declined 1.6% to close at 3,427. With the sell-off, the index is now up 6.1% year to date. 
• Stocks faded to begin the week with Monday's sell-off marking the fourth decline for the S&P 500 in the past five sessions. There was no specific catalyst to point to for Monday's weakness, though third quarter earnings season, politics and the pandemic all continue to dominate market attention. While equities sold off sharply on the day, cross-asset action was more muted with Treasury yields actually moving slightly higher across the curve.   
• All 11 S&P sectors were lower, with Energy (-2.1%) and Information Technology (-1.9%) the worst-performing sectors on the day. Utilities (-0.9%) outperformed on the session. 
• Outside of the equity market, Treasury yields moved slightly higher in Monday's trading with the 10-year Treasury yield settling near 0.76% as of the 4 p.m. equity market close. Gold moved slightly higher on the session, while crude oil prices moved slightly lower. The US dollar was modestly weaker on the day, as measured by the US Dollar Index. 

US stocks traded sharply lower on Monday, as the S&P 500 shed 1.6%. Monday's sell-off marks the fourth decline in the past five trading days for the S&P 500. This recent string of selling follows a strong late September / early October period that saw the S&P 500 trade above 3,500 and within 1% of the September 2 all-time high. While there hasn't been an obvious catalyst to point to for this recent dip, political considerations and pandemic updates may be weighing on equity markets that had been extended from their recent moving averages and likely susceptible to some consolidation. Markets remain fixated on politics as the back and forth over additional stimulus continues in Washington while general political uncertainty remains high ahead of the election that is now just two weeks away. Expect markets to remain volatile ahead of the election, and potentially for a period after, should results not be immediately clear on election night. That said, it is important to remember that over the intermediate and long term markets respond more to the business cycle than the political calendar, and ultimately the 'known unknown' nature of the election is likely a manageable risk for investors. While equities sold off on Monday, beneath the surface and cross-asset action paints a more sanguine picture than perhaps the index sell-off suggests: Cyclical sectors mostly outperformed, while small-caps also outperformed large-caps on the day. Treasury yields actually moved slightly higher across the curve and commodity prices were generally little changed. Looking ahead, the week is full of corporate results as third quarter earnings season continues. Economic data will also be in focus with a host of housing data slated to be reported this week, while politics will also be in the forefront with Thursday night's final presidential debate. 

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.