Wealth Management — October 28, 2020
- US stocks traded lower Wednesday as the S&P 500 declined 3.5% to close at 3,271. With the sell-off, however, the index is still up 1.3% year to date.
- Wednesday's 3.5% decline marks the worst session for the index since June 11. While the recent uptick in global COVID-19 cases has appeared to weigh on sentiment in recent days, these concerns were further amplified on Wednesday as France and Germany became the latest countries to re-impose partial lockdowns / stay-at-home orders. Volatility surged with the CBOE Volatility Index (VIX) hitting its highest level since June; expect volatility to remain elevated in the days ahead as markets prepare for next week's US election results.
- All 11 S&P 500 sectors were lower, with Real Estate (-2.4%) and Financials (-2.5%) outperforming the broader market, while Energy (-4.2%) and Information Technology (-4.3%) lagged.
- While equities sold off sharply, Treasury markets were remarkably stable on Wednesday, with yields essentially unchanged with the 10-year settling near 0.77% as of the 4 p.m. equity close. Gold and oil fell sharply during the session, while the dollar rallied modestly as measured by the US Dollar Index.
US stocks traded lower on Monday as the S&P 500 fell 3.5%, marking the index's worst single-day loss since June 11. The S&P 500 has now declined for three straight sessions as an increase in COVID-19 cases globally appears to be weighing on sentiment. In Europe, rising cases have led to stricter restrictions from various regional governments with France and Germany the latest countries to re-impose partial lockdowns that are expected to remain in place through the month of November. In the United States, volatility stemming from the recent uptick in cases has likely been further exacerbated by the lack of clarity on additional fiscal stimulus measures, with lawmakers in Washington D.C. failing to reach a stimulus deal in recent weeks. While a stimulus deal may still be reached following the election or early next year, uncertainty surrounding fiscal policy, as well as general political uncertainty ahead of next week's election, is likely to keep volatility elevated in the days ahead. With the recent decline, the S&P 500 is now down 8.7% from the early September high, but is still in positive territory on the year to date. Looking ahead, a busy week for corporate earnings continues with several of the mega-cap technology stocks slated to report results Thursday afternoon. Thursday will also see the US 3Q GDP report, which is expected to show sharp sequential economic growth versus 2Q20 but a significant year-on-year decline versus 3Q19―a dynamic that would reflect just how deep the economic disruption was through recession in the first half of the year as well as an economy that now appears to be recovering.
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.
VIX: This is a trademarked ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 Index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market’s expectation of stock market volatility over the next 30-day period.