The 1% Move Report

Wealth Management — October 29, 2020

• US stocks traded higher on Thursday as the S&P 500 rose 1.2% to close at 3,310. With the rally, the index is now up 2.5% year to date. 
• Stocks rebounded Thursday following three consecutive days of losses, which included Wednesday's more than 3.5% decline, which marked the worst single session for stocks since June. While there was no specific catalyst to point to for the rally, a strong 3Q GDP report on Thursday morning may have helped buoy sentiment. Earnings are also in focus, with four of the top five companies in the S&P 500 by market cap scheduled to report after the bell on Thursday. 
• Ten of the 11 S&P sectors were higher, with Energy (+3.2%) and Communication Services (+2.9%) outperforming the broader market, while Consumer Staples (+0.04%) and Health Care (-0.7%) lagged. 
• Outside of the equity market, Treasury yields moved higher across the curve, with the 10-year Treasury yield rising to 0.82% as of the 4 p.m. equity market close. Gold moved slightly lower on the session, while crude oil prices also moved lower. The US dollar was modestly stronger on the day, as measured by the US Dollar Index.

US stocks traded sharply higher on Thursday, as the S&P 500 rallied 1.2%. Thursday's rally follows three consecutive declines for the S&P 500, and the index is still in the red for the week. While there was no obvious catalyst for the rally, strong economic data released on Thursday morning may have helped buoy sentiment. The 3Q GDP report showed US GDP rose 33% on an annualized basis versus 2Q, the sharpest sequential expansion in economic output on record. However, much of the strength was a result of the unprecedented drop in GDP the prior quarter and on a year-on-year basis, US GDP is still down 3% versus 3Q19. Putting it together, the 3Q GDP report points to an economy that is recovering quickly from a historically deep recession in the first half of the year, but there is still a long way to go toward normalization. The weekly jobless claims data this morning paints a similar picture--initial claims fell to seven-month lows at 751,000, but with the absolute number of job losses still high, clearly there is still room for improvement in labor markets. On the back of Thursday's economic releases, rates surged higher across the curve, with 10-year rates testing their highest levels since June. Looking ahead, there will be a full slate of economic data in the coming days with October personal income data tomorrow and the ISM manufacturing survey release on Monday. Corporate fundamentals will also be in focus as 3Q earnings season crescendoes with several of the mega-cap technology companies reporting after the bell on Thursday. Markets are also likely to remain volatile ahead of next week's US election on Tuesday. 

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.