Wealth Management — September 28, 2020
What Happened in the Markets?
- US stocks traded higher Monday as the S&P 500 rose 1.6% to close at 3,352. With the rally, the index is up 3.7% year to date.
- There was no obvious catalyst for Monday's rally, though after posting four consecutive weekly declines, the first such string of weekly losses for the S&P 500 in more than a year, perhaps some relief was due. Sentiment may have received a lift from reports on Monday suggesting negotiations are continuing between Congressional Democratic leadership and the White House with regard to further stimulus, though to date, it still appears little tangible progress has been made.
- All 11 S&P 500 sectors were higher, with Energy (+2.3%) and Financials (+2.3%) outperforming the broader market, while Health Care (+0.8%) and Utilities (+0.3%) lagged.
- Rates were mixed across the curve, with the 10-year Treasury rate rising to 0.66% as of the 4 p.m. equity market close. Gold rose 1.1% to $1,882 per ounce, while WTI oil also moved higher to over $40 per barrel; the US dollar weakened modestly in the trading session, as measured by the US Dollar Index.
Catalysts for Market Move
US stocks traded higher on Monday as the S&P 500 rose 1.6%, marking back-to-back days of gains of more than 1%. As was the case on Friday, there appeared to be no single catalyst for the rally, though after four consecutive weekly declines for the S&P 500 perhaps markets were due for a bounce. Monday's rally was broad based with all 11 S&P sectors finishing higher on the day and more than 90% of S&P 500 members rallying. While stocks have been weaker for much of September, the S&P 500 is still on track to deliver an 8.1% return in 3Q with two days left in the quarter. After a strong August that saw the S&P 500 rally to new all-time highs, September has brought a return of volatility. Concerns over waning fiscal stimulus, a potential COVID-19 second wave, and the looming uncertainty of the November election cycle in the US, all have likely contributed to the recent weakness in equities. With uncertainty likely to remain elevated in the coming weeks on several fronts, expect markets to remain volatile in the near term. Looking ahead, markets are likely to remain focused on politics this week, with ongoing fiscal negotiations and Tuesday night's presidential debate. This week will also see a host of important economic data releases, with the ISM manufacturing print on Thursday, and the September non-farm payrolls report on Friday.
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.