Wealth Management — September 18, 2020
- US stocks traded lower on Friday as the S&P 500 declined 1.1% to close at 3,319. Even with the sell-off, the index is still up 2.8% year to date.
- Friday’s sell-off leaves the S&P 500 down for a third consecutive week—the first such three-week string of losses in nearly a year. As has been the case in recent weeks, weakness in Technology stocks appears to be weighing on the broader market, with the NASDAQ Composite Index now down more than 10% from the early September all-time high. While there is no single catalyst to explain the month-to-date weakness, after a strong August that left the major equity indices extended versus their recent moving averages, perhaps some consolidation was already due.
- All 11 of the S&P 500 sectors were lower, with Health Care (-0.1%) and Financials (-0.2%) outperforming the broader market, while Utilities (-1.8%) and Real Estate (-2.0%) lagged.
- Rates were higher across the curve, with the 10-year Treasury rate rising to 0.69% as of the 4 p.m. equity market close. Gold rose 0.3% to $1,950 per ounce, while WTI oil moved lower to just below $41 per barrel; the US dollar weakened modestly in the trading session, as measured by the US Dollar Index.
US equities traded lower on Friday as the S&P 500 declined 1.1%. Friday’s sell-off leaves the S&P 500 down for a third consecutive week—the first such three-week string of losses in 2020. While markets had begun the week on a strong note, a reversal Wednesday afternoon, following the FOMC meeting, gained steam into the weekend, as the index has now also closed lower for three straight sessions. As has been the case in recent weeks, weakness in Technology stocks appears to be weighing on the broader market, with the NASDAQ Composite Index now down more than 10% from the early September all-time high. While there has been no single catalyst for the recent decline, markets were extended coming into the month following a strong August, and some consolidation was likely due. Focus remains on Washington D.C. as policymakers continue to negotiate over another round of potential fiscal stimulus, and perhaps sentiment has taken a hit in recent weeks as little progress has been made to date. While the S&P 500 closed in the red, underneath the surface market action was more positive than index losses would suggest. The S&P 500 closed well off of its session low and despite the 1% loss for the index, cyclical sectors largely outperformed during the session, while the small-cap Russell 2000 Index closed down only 0.4%. The CBOE Volatility Index (VIX) also declined during the session, a relative rarity on days of market declines.
While stocks have fallen since setting fresh record highs earlier this month, 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.
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.