Wealth Management — September 21, 2020
What Happened in the Markets?
- US stocks traded lower on Monday as the S&P 500 declined 1.2% to close at 3,281. Even with the sell-off, the index is still in positive territory for the year to date, having rallied 1.6%.
- Markets began the week on a soft note as global equities sold off on Monday. Cyclical sectors underperformed as several factors appeared to weigh on sentiment. While the S&P 500 did end the session squarely in the red, a late-afternoon rally led by Technology stocks did see the index close well off of its session lows, and the NASDAQ 100 Index even finished in positive territory for the day after having declined by more than 2% in the morning’s trading.
- Ten of the 11 S&P 500 sectors were lower, with Information Technology (+0.8%) and Utilities (-0.6%) outperforming the broader market, while Industrials (-3.4%) and Materials (-3.4%) lagged.
- Rates were lower across the curve, with the 10-year Treasury rate falling to 0.67% as of the 4 p.m. equity market close. Gold fell 2.0% to $1,912 per ounce, while WTI oil moved lower to just below $40 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 Monday as the S&P 500 declined 1.2%. Monday’s decline comes after three consecutive weeks of losses for the S&P 500 to begin September, the longest such streak of weekly losses for the index in 11 months. A number of factors appeared to weigh on sentiment Monday. In Europe, several leaders across the continent have discussed in recent days a concerning uptick in COVID-19 cases, raising concerns that restrictions on activity or even targeted lockdowns could be implemented. In the US, market focus remains on the fiscal stimulus negotiations taking place in Washington; with little progress made to date and a complicated political calendar in the weeks ahead, Monday’s equity market sell-off may reflect rising apprehension that a deal may not come to fruition. Cyclical sectors underperformed sharply on Monday; the small-cap Russell 2000 Index fell more than 3%, while the Energy, Industrials and Materials sectors also declined by more than 3% each. Notably, however, a midday reversal in technology shares allowed the S&P 500 to close well off of its lows for the session, and the tech-heavy Nasdaq 100 even closed in positive territory for the day. Looking ahead, various economic data will be reported this week, including existing home sales tomorrow, Markit PMIs Wednesday, and jobless claims Thursday. Policy will also be in focus, with both the Fed Chair and US Treasury Secretary scheduled to testify before Congress later this week.
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.
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.