The 1% Move Report

Wealth Management — September 3, 2020

• US stocks sold off sharply on Thursday as the S&P 500 declined 3.5% to close at 3,455. Even with Thursday’s sell-off, the index is still up 6.9% year to date.
• After rallying nine times in the past ten sessions, and setting nine new record highs in the process, markets reversed lower on Thursday, as the S&P 500 recorded its first 1%+ single-day decline since July 23. While there was no obvious catalyst to point to for Thursday’s sell-off, perhaps some consolidation was due given the extent of recent gains. Outsized weakness in the Technology sector, the primary source of recent index gains, weighed on markets today, with the S&P 500 Technology sector ending the day down 5.8%. A busy week of economic data concludes tomorrow, with the release of the August nonfarm payrolls report; consensus estimates call for 1.35 million in net job additions last month.    
• All 11 of the S&P 500 sectors were lower, with Energy (-0.7%) and Utilities (-1.3%) outperforming the broader market, while Consumer Discretionary (-3.6%) and Information Technology (-5.8%) lagged.
• Rates were lower across the curve, with the 10-year Treasury rate falling to 0.63% as of the 4 p.m. equity market close. Gold declined modestly to $1,931 per ounce, while WTI oil moved lower towards $41 per barrel. The US dollar weakened modestly in the trading session, as measured by the US Dollar Index. 

US stocks sold off sharply on Thursday, with the S&P 500 shedding 3.5%, to close at 3,455. After rallying in nine of the past ten sessions coming into Thursday, markets may have been extended and some consolidation of recent gains was likely due, which may have contributed to Thursday’s decline. The 3.5% loss in the S&P 500 was the biggest one-day decline since June 11. While there was no obvious catalyst to point to for the sell-off, outsized weakness in the Technology sector weighed on markets broadly, with the S&P 500 Technology sector down nearly 6% on the session, the worst day since March 16. Technology has been the leading sector year-to-date and the primary source of recent index gains, so Thursday’s reversal may simply be nothing more than profit taking in a leading sector. Outside of Thursday’s market action, labor market data remains in focus this week ahead of Friday’s August nonfarm payrolls report. This morning’s weekly jobless claims data showed initial jobless claims falling to 881,000, the lowest initial claims number since March, while continuing claims also beat expectations, falling to 13.2 million. Consensus estimates call for tomorrow’s jobs report to show that the US economy added 1.35 million jobs in August, which would mark the fourth consecutive month of job gains.

With the recent rally, the S&P 500 has traded to 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.