The 1% Move Report

Wealth Management — November 4, 2020

• US stocks traded sharply higher Wednesday as the S&P 500 rose 2.2% to close at 3,443. With the rally, the index is now up 6.6% on the year to date.
• It was a volatile session overnight as markets reacted to the latest updates from the election. While the Presidential results remain too close to call, markets took a decisive turn overnight as it appeared increasingly likely that Congressional power would be split, with the House of Representatives remaining under Democratic control while the Republicans were likely to maintain control of the Senate. A split Congress seemingly reduces some of the uncertainty as it relates to the Presidential election, as it is unlikely broad, sweeping legislative changes will be reached under this gridlock scenario during the next Congressional term. Markets appeared to quickly price in this gridlock, with Treasuries rallying sharply, while on the equity side, perceived beneficiaries of a status quo policy environment led markets higher.
• Seven of the 11 S&P 500 sectors were higher, with Health Care (+4.5%) and Communications Services (+4.3%) outperforming the broader market, while Utilities (-1.6%) and Materials (-1.7%) lagged.
• Rates were lower across the curve, with the 10-year Treasury rate falling to 0.77% as of the 4 p.m. equity market close. Gold was 0.3% lower, while WTI oil moved higher to nearly $39 per barrel; the US dollar weakened modestly in the trading session, as measured by the US Dollar Index.

US stocks traded higher on Tuesday as the S&P 500 gained 2.2%. This marks the third consecutive rally for the S&P 500, and with the gains, the index has now almost fully retraced last week's near 6% decline. Tuesday's election was the primary driver of Wednesday's market action. While results remain uncertain and the Presidential election remains too close to call, updates on various Senate elections may have had a bigger impact on Wednesday's trading. While many had predicted in advance of the election a 'blue-wave' scenario in which Democrats would take control of both houses of Congress, as results came in Tuesday night it became increasingly clear that the Senate would likely remain in Republican hands with Democrats unlikely to flip enough seats to reach a majority. This likely leaves us with a 'gridlock' scenario for the next Congressional term, as neither party has unified control of Congress, and as a result, limits the scope of legislative action going forward. With a divided Congress, the market impact of the outcome of the Presidential election diminishes, and this likely allowed equities to rally despite lingering uncertainty over who will take the White House in January. Markets appeared to quickly price in some of the impacts of the 'gridlock' scenario, with Treasuries rallying sharply, presumably on the expectation for narrower deficits and less issuance, while perceived beneficiaries of this status quo policy environment, such as health care and technology stocks, led the equity market higher. While strength in these sectors was enough to power the S&P 500 to 2%+ gains, more than half of the index's constituents actually traded lower on the day, and the average stock in the index traded roughly flat on the session. Looking ahead, markets will continue to focus on incoming election results, as well as Thursday's FOMC meeting and Friday's October jobs report.

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.