The 1% Move Report

Wealth Management — October 30, 2020

• US stocks traded lower Friday as the S&P 500 declined 1.2% to close at 3,270. With the sell-off, the index is now up only 1.2% on the year to date.
• The S&P 500 fell for the fourth time in five trading sessions, with Friday's sell-off leaving the index down 5.6% on the week. This marks the worst week for the index since March, as a number of catalysts have weighed on sentiment. Uncertainty ahead of next week's election, an increase in COVID-19 case growth and US lawmakers' failure to reach a deal on fiscal stimulus all likely contributed to this week's sell-off. Economic and earnings reports largely surprised to the upside this week, but these fundamental bright spots appeared largely overshadowed by broader market concerns. While stocks sold off, Treasury rates did, in fact, move higher across the curve this week―a notable divergence suggesting bond markets are pricing a more sanguine view of the economy than the S&P 500 sell-off would suggest.
• Nine of the 11 S&P 500 sectors were lower, with Financials (+0.3%) and Energy (+0.2%) outperforming the broader market, while Information Technology (-2.4%) and Consumer Discretionary (-3.0%) lagged.
• Rates were higher across the curve, with the 10-year Treasury rate rising to 0.87% as of the 4 p.m. equity market close. Gold was 0.6% higher, while WTI oil moved lower to $35.50 per barrel; the US dollar strengthened modestly in the trading session, as measured by the US Dollar Index. 
  

US stocks traded lower on Friday as the S&P 500 fell 1.2%. With the decline, the S&P 500 posted its worst week since March as the index fell 5.6%. Equity markets have reacted negatively this week as an increase in COVID-19 cases swept across much of the globe, with Europe and the US particularly in focus. This week's rise in cases drew several European governments to re- instate lockdowns, sparking concerns that economic activity could decline as was witnessed earlier this year. Adding to the uncertainty of the pandemic, US lawmakers' failure to reach a deal on stimulus in recent weeks has likely weighed on sentiment, and uncertainty remains high ahead of next week's election. This week's political and virus headlines may have overshadowed what was largely a strong week for fundamental data releases. Thursday's GDP report showed the US economy returned to growth in the third quarter, and Friday's personal income and personal spending releases also surprised to the upside. Third-quarter earnings season has also been strong, with more than 85% of reporting companies beating consensus expectations to date. Strong earnings results this week, however, were not enough to power stocks higher, and this week did see a notable sell-off in technology stocks. Even strong technology sector earnings prints were sold, perhaps reflecting the extent to which expectations have been elevated following strong year-to-date stock performance. While equity markets traded lower this week, Treasuries did not confirm the move―yields actually ended the week higher across the curve, with the 10-year Treasury settling at 0.87%, its highest level since early June. Looking ahead, next week's big events include Monday's ISM Manufacturing release, Tuesday's election, and Friday's October non-farm payrolls 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.