Wealth Management — September 8, 2020
- US stocks sold off on Tuesday as the S&P 500 declined 2.8% to close at 3,332. Even with Tuesday’s sell-off, the index is still up 3.1% year to date.
- Tuesday’s decline marks the third straight session of losses for the S&P 500. This three-day losing streak comes after a two-week stretch in markets that saw the S&P 500 close higher in nine of 10 sessions, with the index also setting nine record highs over that period. Given the extent of enthusiasm in markets during that stretch, some consolidation was likely due and perhaps this has been resolved with a now three-day, 6.95% correction in the S&P 500, which rivals the largest sell-off the index has experienced since the March lows (mid-June sell-off saw the index decline 7.1%). As has been the case in recent sessions, outsized weakness in Technology shares appeared to weigh on the broader market; the S&P Technology sector was down more than 4% on the session.
- All 11 of the S&P 500 sectors were lower, with Utilities (-0.6%) and Real Estate (-1.3%) outperforming the broader market, while Energy (-3.7%) and Information Technology (-4.6%) lagged.
- Rates were lower across the curve, with the 10-year Treasury rate falling to 0.68% as of the 4 p.m. equity market close. Gold declined modestly to $1,929 per ounce, while WTI oil moved sharply lower to below $37 per barrel; the US dollar strengthened modestly in the trading session, as measured by the US Dollar Index.
US stocks sold off on Tuesday, with the S&P 500 declining 2.8%, to close at 3,332. After a two-week stretch that saw the S&P 500 rally nine times in 10 sessions as the index moved to record highs, a three-day string of losses has materialized, with the index now having fallen 6.95% from last Wednesday’s high. This pullback now rivals the S&P 500’s deepest correction since the March lows (the mid-June sell-off saw the index decline 7.1%). While there are no obvious catalysts to point to for the recent move lower, there were similarly few obvious catalysts to explain much of August’s strength, and with equity markets appearing extended versus moving averages ahead of the recent correction, some consolidation of recent gains may have been due. Over the past few sessions, outsized weakness in the Technology sector has weighed on the broader market, with the S&P 500 Technology sector now down 11% since last Wednesday’s close. Even with the recent weakness, the Tech sector remains the strongest-performing sector on the year, having rallied 23% year to date. While some cyclical sectors fared better on Tuesday, Energy was a notable laggard, as crude oil prices fell more than 7% during the session. In a holiday-shortened week with a relatively light economic data calendar, focus is likely to center on Washington D.C. in the coming days, as Congress returns from its late-summer recess and negotiations over additional potential stimulus measures are expected to heat up.
Even with the recent sell-off, 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.