Wealth Management —October 5, 2020
What Happened in the Markets?
- US stocks traded higher Monday as the S&P 500 rose 1.8% to close at 3,409. With the rally, the index is now up 5.5% year to date.
- US stocks opened the week on a strong note, with equity markets rebounding following Friday's losses. Both Friday's sell-off and Monday's rally appeared to be driven in part by updates to the President's health. Optimism that a fiscal deal can still be reached in Washington following several constructive comments from both Democrat and Republican leaders over the weekend also likely contributed to Monday's rally. Alongside the move higher in stocks, long-end bond yields also spiked on Monday, with 10-year Treasury rates testing their August highs.
- All 11 S&P 500 sectors were higher, with Energy (+2.9%) and Information Technology (+2.3%) outperforming the broader market, while Consumer Staples (+0.8%) and Real Estate (+0.6%) lagged.
- Rates were higher across the curve, with the 10-year Treasury rates rising to 0.78% as of the 4 p.m. equity market close. The yield curve steepened, with 10-year rates rising more than 2-year rates. Gold rose 0.7% to $1,913 per ounce, while WTI oil moved higher to just above $39 per barrel; the US dollar weakened modestly in the trading session, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks traded higher on Monday as the S&P 500 rose 1.8%. Markets rebounded to start the week after the S&P 500 Index fell nearly 1% on Friday. As was the case on Friday, markets remain focused on updates surrounding the President's health; while news that the President had tested positive for COVID-19 last Thursday night weighed on markets last week, Monday's announcement that the President would be returning back to the White House following treatment over the weekend at Walter Reed National Military Medical Center may have helped lift sentiment. With Monday's rally, the S&P 500 again traded back above the levels prior to news of the President's positive test. Cyclical sectors were largely outperformers on Monday, and small-caps also outperformed, with the Russell 2000 Index up nearly 3% on the session. Markets may have received a boost over the weekend from comments from both Democrat and Republican lawmakers that suggest a deal on more stimulus may still be achievable. Perhaps the best reflection of Monday's change in sentiment came from bond markets, as yields spiked across the curve, with the 10-year Treasury yield ending the day at 0.78%, just shy of the August highs. Looking ahead, while this week is light on the economic data front, markets will be eagerly awaiting the start of third-quarter earnings season, which begins in earnest next week with results from a host of US financial institutions.
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.