Wealth Management — September 2, 2020
- US stocks traded higher on Wednesday as the S&P 500 rose 1.5% to close at 3,581. With the rally, the index is now up 10.8% year to date, and closed at a new all-time high.
- The S&P 500 posted its ninth day of gains in the past ten sessions, as equity markets continue to trade to new record highs in recent weeks. While there was no obvious catalyst to point to for Wednesday’s rally, a busy week of economic data may be boosting sentiment. Yesterday, the ISM Manufacturing Survey as well as the new orders component of the report came in ahead of expectations, with manufacturing sentiment pointing to a strong recovery in activity in the months ahead. Wednesday morning’s ADP employment report kicked off a busy week for labor market data (Weekly Jobless Claims Thursday, and August Nonfarm Payrolls report Friday); the ADP report showed private payrolls rose 428,000 in August, below expectations but still healthy growth and an acceleration versus July's 212,000 increase.
- Ten of the 11 S&P 500 sectors were higher, with Utilities (+3.1%) and Materials (+2.3%) leading the broader market, while Information Technology (+0.9%) and Energy (-0.4%) lagged.
- Rates were mixed across the curve, with the 10-year Treasury rate falling to 0.65% as of the 4 p.m. equity market close. Gold declined 1.4% to $1,942 per ounce, while WTI oil moved down towards $41 per barrel; the US dollar strengthened modestly in the trading session, as measured by the US Dollar Index.
US stocks rallied on Wednesday, with the S&P 500 gaining 1.5% to close at 3,581. Wednesday’s rally marks the ninth time in the past ten sessions the index has closed higher on the day; the index has now made nine new all-time highs since August 18, when the index initially reclaimed the February 19 high. While there was no obvious headlines to point to for Wednesday’s rally, a busy week of economic data continues with Weekly Jobless Claims and ISM Services on deck tomorrow, while the August Nonfarm Payrolls report awaits Friday morning. Wednesday’s equity leadership was in stark contrast to what markets have witnessed in recent sessions: Technology and the internet-heavy Consumer Discretionary sectors lagged the broader index on the day, while Utilities, Materials and Real Estate led the market higher. Long-end rates also declined slightly on the session, while gold fell more than 1% and the US dollar rallied modestly.
With the recent rally, the S&P 500 has traded to new all-time highs. The year 2020 has now seen both a 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 could 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 few 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.