Wealth Management — September 10, 2020
What Happened in the Markets?
- US stocks traded lower on Thursday as the S&P 500 declined 1.8% to close at 3,339. Even with Thursday’s sell-off, the index is still up 3.4% year to date.
- There was no single catalyst to explain Thursday’s decline; however, the morning’s weekly jobless claims report did miss expectations and headlines out of Washington D.C. throughout the afternoon did little to inspire confidence that a deal between Democrat and Republican lawmakers could be within reach. As has been the case in recent sessions, action in Technology stocks dominated the broader market, with an afternoon sell-off in Tech materializing and dragging the market lower.
- All 11 of the S&P 500 sectors were lower, with Materials (-0.9%) and Consumer Staples (-1.3%) outperforming the broader market, while Information Technology (-2.3%) and Energy (-3.7%) lagged.
- Rates were lower across the curve, with the 10-year Treasury rate falling to 0.68% as of the 4 p.m. equity market close. Gold fell 0.2% to $1,942 per ounce, while WTI oil also moved lower to $37 per barrel; the US dollar strengthened modestly in the trading session, as measured by the US Dollar Index.
Catalysts for Market Move
US equities traded lower on Thursday as the S&P 500 declined 1.8% to close at 3,339. After a strong August that saw the major US averages largely drift higher, led by a surge in Technology stocks, volatility has returned to begin September, as a reversal in the Technology sector has weighed on the broader market. While Wednesday’s rally snapped a three-day string of losses that saw the S&P 500 decline 7% while the NASDAQ 100 Index fell more than 11%, the downward pressure resumed with Thursday’s sell-off. As has been the case in recent sessions, there was no single catalyst to point to for Thursday’s slide, though once again the Technology sector lagged on the day. There were several negative headlines Thursday that may have contributed to the sell-off, however, including a disappointing weekly jobless claims print as well as downbeat commentary out of several lawmakers in Washington around the prospects of another stimulus deal. Looking ahead, Friday will see the release of the monthly CPI report in the United States, while next week will see the September FOMC meeting and subsequent press conference.
Even with the recent sell-off, the S&P 500 still trades in positive territory for the year to date. The year 2020 has now seen both a dramatic bear market and a subsequent V-shaped market recovery. While markets corrected sharply this spring as the COVID-19 pandemic drove the US and global economies into recession, stocks have bounced back almost as rapidly, as markets look to what increasingly appears to be an economic recovery in the second half of 2020. While the health crisis has wreaked havoc on the economy and driven a near-unprecedented spike in unemployment, policymakers have reacted, and record levels of stimulus should help ease the burden the current crisis is putting on households, businesses and the economy at large. A one-two punch of monetary and fiscal policy is being delivered in the US, as policy makers confront the current economic challenges. US policymakers acted aggressively to address the challenges posed to the economy this spring, and ultimately this policy response has helped drive a recovery in the economic data in recent months. While green shoots are apparent, uncertainty remains high, and the pace of recovery going forward likely hinges on whether or not further fiscal stimulus measures are agreed to in Washington D.C.
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.