Wealth Management — October 26, 2020
What Happened in the Markets?
- US stocks traded lower Monday as the S&P 500 declined 1.9% to close at 3,401. With the sell-off, however, the index is still up 5.3% year to date.
- Monday's nearly 2% decline marks the worst session for the index in four weeks. Equity markets have come under pressure in recent sessions as volatility picks up ahead of next week's US election. The lack of a pre-election fiscal deal in Washington has likely amplified recent weakness, and outside of politics, rising COVID-19 case growth has also weighed on sentiment.
- All 11 S&P 500 sectors were lower, with Utilities (-0.1%) and Health Care (-1.1%) outperforming the broader market, while Industrials (-2.5%) and Energy (-3.5%) lagged.
- Rates were lower across the curve, with the 10-year Treasury rate falling to 0.80% as of the 4 p.m. equity market close. Gold was flat, while WTI oil moved lower to $38.50 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 lower on Monday as the S&P 500 fell 1.9%, marking the index's worst daily loss since September 23. Markets remain focused on politics, as the back and forth over stimulus continues in Washington D.C. and next week's election dominates attention. With the odds of a pre-election fiscal deal looking slim, volatility has picked up in recent sessions. Outside of politics, anxiety over rising COVID-19 case growth also likely weighed on markets on Monday. With confirmed new case growth in the US eclipsing its high from the summer while much of Europe is also seeing accelerating growth in new cases, concerns are growing that rising new cases may lead to new restrictions that could weigh on economic activity. Outside of politics and the pandemic, corporate fundamentals are also in focus, as third-quarter earnings season continues--this week will mark the busiest week for S&P 500 earnings, with nearly 50% of the S&P 500 by market cap scheduled to report results.
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.