The 1% Move Report

Wealth Management — July 23, 2020

• US stocks traded lower on Thursday as the S&P 500 fell 1.2% to close at 3,236. With the sell-off, the index is now up 0.2% year to date and has corrected 4.4% from the February 19 all-time high.
• Thursday’s decline snaps a four-day streak of gains for the S&P 500. Stocks opened the day slightly lower Thursday morning as markets digested a slew of earnings releases overnight as well as a higher-than-expected weekly initial jobless claims figure. Action was fairly muted, however, until an afternoon sell-off materialized, as tech shares came under pressure and reversed sharply lower on little obvious news. Focus also remains on Washington D.C. as policy makers discuss a potential additional round of stimulus ahead of next week’s expiration of the expanded unemployment benefits provided under the CARES Act.   
• Eight of the 11 S&P 500 sectors were lower, with Consumer Staples (+0.2%) and Financials (+0.2%) leading the broader market, while Consumer Discretionary (-2.0%) and Information Technology (-2.6%) lagged.
• Rates were lower across the curve, with the 10-year Treasury rate falling to 0.58% as of the 4 pm equity market close. Gold prices rose 0.8% while WTI oil fell back toward $41 per barrel; the US dollar weakened modestly on the day, as measured by the US Dollar Index. 

US stocks fell sharply on Thursday, with the S&P 500 declining 1.2%. It was the first down day in five trading sessions for the S&P 500. Markets opened the day slightly lower following mixed reaction to earnings releases overnight and a surprising uptick in the weekly initial jobless claims data released Thursday morning. After declining for 15 straight weeks, last week’s initial claims data showed 1.4 million Americans filed for jobless benefits for the first time, slightly above expectations and a slight uptick versus last week’s figure of 1.3 million. While initial claims rose, stoking concerns that the labor market recovery may be stalling out, continuing claims did fall more than expected, providing a more positive signal regarding the pace of re-hiring. Outside of the earnings and economic data, Washington D.C. remains in focus as policy makers negotiate over a potential new round of stimulus. With the expanded federal unemployment benefits provided by the CARES Act set to expire at month end, markets will be paying close attention to policy makers in the coming days. Thursday’s slide was also characterized by outsized weakness in technology and internet-related stocks, with recent leaders coming under pressure following mixed reaction to several notable earnings reports last night.  

Even with today’s losses, the S&P 500 is still positive on a year-to-date basis, and down just 4.4% since its previous all-time high of 3,386 on February 19. After falling 20% in the first quarter of 2020—the worst quarter for the index since 4Q 2008—the S&P 500 finished the second quarter having rallied back 20%—the strongest quarter for the index since 4Q 1998. 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, policy makers 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 policy makers have acted aggressively to address the challenges posed to the economy, and ultimately this policy response should help drive an economic recovery once the current health crisis is resolved. Early signs of that potential recovery appear to be at hand, with green shoots apparent in the recent economic data.

Over the past 90 days, 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 through 3,000 and its 200-, 100- and 50-day moving averages. 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.