The 1% Move Report

Wealth Management — August 24, 2020

• US stocks traded higher on Monday as the S&P 500 rose 1.0% to close at 3,431. With the rally, the index is now up 6.2% year to date, and closed at a new all-time high.
• After closing at a new all-time high for the first time since February last week, the S&P 500 picked up where it left off to begin the new week. Stocks opened higher this morning before giving up early gains, only to see a mid-afternoon rally take hold with the index closing at its high for the session. Market sentiment may have been boosted Monday by several reports over the weekend suggesting progress on potential COVID-19 treatments and vaccines. Leadership Monday favored cyclical sectors, and small caps also slightly outperformed on the session.
• Ten of the 11 S&P 500 sectors were higher, with Energy (+2.8%) and Financials (+2.3%) leading the broader market, while Real Estate (+0.2%) and Health Care (-0.5%) lagged.
• Rates were higher across the curve, with the 10-year Treasury rate rising to 0.65% as of the 4 p.m. equity market close. Gold prices finished 0.8% lower on the day while WTI oil rose to just below $43 per barrel; the US dollar strengthened modestly in the trading session, as measured by the US Dollar Index. 

US stocks rallied on Monday, with the S&P 500 gaining 1.0% to close at 3,431. With today’s rally, the S&P 500 closed at another all-time high, building on last week’s momentum, which saw the index close above the February 19 high for the first time, fully retracing the losses from the 2020 pandemic-related bear market. Monday’s news flow appeared relatively light, though reports over the weekend suggesting progress had been made on potential COVID-19 treatments and vaccines may have contributed to Monday’s rally.  Leadership Monday favored cyclical sectors, with Energy, Financials, Industrials and Materials all outperforming the broader index. Small caps also outperformed large caps during the session, and interest rates moved slightly higher across the curve.

With the recent rally, the S&P 500 has reached new all-time highs. 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 could 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 few 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.