Wealth Management — September 9, 2020
What Happened in the Markets?
- US stocks traded higher on Wednesday as the S&P 500 rose 2.0% to close at 3,399. With Wednesday’s rally, the index is now up 5.2% year to date.
- After a three-day slide that sent the S&P 500 7% lower, stocks rebounded on Wednesday, as the S&P 500 posted its strongest day since June 5. Technology regained its stride, leading the market higher, with the S&P 500 Technology sector rallying 3.4% on the day. Wednesday’s Tech rally comes as the sector looks to recover from its own three-day slide that saw the S&P Tech sector decline more than 11%. With this week’s relatively quiet economic data calendar, focus is likely to square on policy makers in Washington D.C. over the coming days, as lawmakers return from the late-summer recess to continue debate over a new tranche of potential stimulus.
- All 11 of the S&P 500 sectors were higher, with Information Technology (+3.4%) and Materials (+2.6%) outperforming the broader market, while Financials (+0.9%) and Energy (+0.6%) lagged.
- Rates were higher across the curve, with the 10-year Treasury rate rising to 0.69% as of the 4 p.m. equity market close. Gold rose 0.8% to $1,948 per ounce, while WTI oil also moved higher to $38 per barrel; the US dollar weakened modestly in the trading session, as measured by the US Dollar Index.
Catalysts for Market Move
After three trading sessions of losses in a row, US equities rebounded sharply on Wednesday, with the S&P 500 rallying 2.0% to close at 3,399. Wednesday’s rally was led by Technology stocks, which were the laggards in the recent three-day correction in equities that saw the S&P 500 fall 7% and the NASDAQ Composite fall 10%. The three-day sell-off saw the S&P 500 Technology sector as well as the NASDAQ Composite trade down near their respective 50-day moving averages, a technical indicator followed by many market participants that has acted as support for the market in recent months – with Wednesday’s bounce, the 50-day moving average has so far held as support again on this recent correction. Looking ahead, Thursday morning will see the release of the weekly jobless claims report, while Friday will see the monthly CPI release. Outside of the economic calendar, markets are likely to focus on updates from Washington D.C., as Congress returns from its late-summer recess and negotiations over additional potential stimulus measures are expected to continue in the coming days.
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.
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.