Wealth Management — September 23, 2020
What Happened in the Markets?
- US stocks traded sharply lower on Wednesday as the S&P 500 declined 2.4% to close at 3,237. With the sell-off, the index is now virtually flat on the year to date, up 0.2%.
- With Wednesday’s sell-off, the S&P 500 finishes lower for the fifth time in the past six sessions. As has been the case for much of the month, outsized weakness in Technology stocks weighed on the broader market, with the NASDAQ sharply underperforming the S&P 500 on the day. Cyclicals did not fare much better on Wednesday, however, as markets appear to be growing anxious over the lack of progress on a potential fiscal package in Congress. With several Fed governors emphasizing the need for further fiscal action during their remarks on Wednesday, including Fed Chair Powell in his testimony in front of Congress, we expect market focus to remain on the prospects for more fiscal stimulus in the days ahead.
- All 11 S&P 500 sectors were lower, with Health Care (-1.1%) and Consumer Staples (-1.6%) outperforming the broader market, while Information Technology (-3.2%) and Energy (-4.5%) 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 2.0% to $1,861 per ounce, while WTI oil also 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 stocks traded sharply lower on Wednesday as the S&P 500 fell 2.4%. The S&P 500 closed near its lows for the session. The tech-heavy NASDAQ composite sold off more than 3% on the day, as tech stocks were among the worst performers during the session. With Wednesday’s sell-off, the S&P 500 has now fallen in five of its past six sessions, and should the week-to-date losses hold, the index would be poised to close in the red for a fourth consecutive week. While there was no clear catalyst for the sell-off, comments from various Fed governors emphasizing the need for more fiscal action to continue the economic recovery may have weighed on sentiment. With little progress made to date in Congress on another fiscal stimulus package, and a complicated political calendar in the coming weeks reducing the likelihood of a bipartisan agreement, markets may be growing anxious that more fiscal relief may not be imminent. While equity markets declined on Wednesday, cross-asset action painted a more mixed picture—Treasuries were little changed with yields actually slightly higher across the curve during the session, while gold sold off nearly 2%.
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 policymakers 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.