The 1% Move Report

Wealth Management — October 6, 2020

• US stocks traded lower Tuesday as the S&P 500 declined 1.4% to close at 3,361. With the sell-off, the index is still up 4.0% year to date. 
• Stocks were poised to close higher for a second day in a row after drifting higher for much of the session, but a late-afternoon sell-off materialized, sending stocks sharply lower following news that the White House has halted negotiations on a potential fiscal stimulus package until after the election. Tuesday afternoon's announcement appeared to surprise markets that had previously appeared increasingly optimistic about the prospects for a fiscal deal following more positive comments in recent days from lawmakers on both sides of the aisle.
• Ten of the 11 S&P 500 sectors were lower, with Utilities (+0.9%) and Consumer Staples (-0.7%) outperforming the broader market, while Communication Services (-2.0%) and Consumer Discretionary (-2.1%) lagged.
• Rates were mixed across the curve, with the 10-year Treasury rate falling to 0.74% as of the 4 p.m. equity market close. Gold fell 1.5% to $1,885 per ounce, while WTI oil moved higher to just above $40 per barrel; the US dollar strengthened modestly in the trading session, as measured by the US Dollar Index.

US stocks traded lower on Tuesday as the S&P 500 lost 1.4%. While stocks drifted higher for much of the session, a late-day sell-off materialized following news that the White House has halted negotiations with Congress over a potential fiscal stimulus package until after the election. This news appeared to surprise markets that in recent days appeared to grow increasingly optimistic that a fiscal deal could be reached following positive commentary from lawmakers on both sides of the aisle. While it remains to be seen what the path forward on stimulus negotiations will look like, it would still appear that members from both the Republican and Democratic parties acknowledge the need for more stimulus in the months ahead, though today's announcement likely reduces the likelihood of a near-term deal. Equity markets were quick to sell off following the White House's announcement, while Treasuries rallied. Outside of updates from Washington, looking ahead, 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.

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.