Wealth Management — September 22, 2020
- US stocks traded higher on Tuesday as the S&P 500 rallied 1.1% to close at 3,316. With the rally, the index is now up 2.6% year to date.
- After a string of recent losses, equities stabilized on Tuesday as the S&P 500 rallied more than 1%. Tech stocks, which had been under pressure for much of the month, helped lead the market higher during the session, with the NASDAQ composite the strongest performing of the three major averages. As was the case the day prior, cyclical sectors largely lagged. Focus remains on policymakers, with both the Fed Chair and the Treasury Secretary testifying before Congress this week, as debate over more fiscal stimulus continues in Washington D.C.
- Eight of the 11 S&P 500 sectors were higher, with Consumer Discretionary (+3.0%) and Communication Services (+1.9%) outperforming the broader market, while Financials (-0.9%) and Energy (-1.0%) lagged.
- Rates were mixed across the curve, with the 10-year Treasury rate rising to 0.67% as of the 4 p.m. equity market close. Gold fell 0.5% to $1,902 per ounce, while WTI oil moved higher to just below $40 per barrel; the US dollar strengthened modestly in the trading session, as measured by the US Dollar Index.
After selling off on Monday and following three consecutive weeks of declines, equity markets bounced back on Tuesday, with the S&P 500 rallying 1.1%. While there were few tangible catalysts to point to for Tuesday’s rally, strength in Technology stocks helped send the major averages higher. Cyclical stocks largely lagged, as they did the day prior, with Financials and Energy sectors the largest underperformers. Market focus remains on policymakers in Washington D.C., with both the Fed Chair and Treasury Secretary testifying before Congress this week to provide updates on the economy and recently enacted stimulus measures. This testimony comes as Democrats and Republicans continue to negotiate over additional potential stimulus. While little progress has been made recently, we expect market focus to remain on policymakers in the coming days as markets look to price the prospects of a stimulus deal.
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.