The 1% Move Report

Wealth Management — October 12, 2020

• US stocks traded higher Monday as the S&P 500 rose 1.6% to close at 3,534. With the rally, the index is now up 9.4% year to date. 
• Building on last week's momentum, stocks rallied to begin the new week with the S&P 500 trading back above 3,500 and within 2% of the early September all-time high. While last week's rally was led by cyclicals as markets focused on the latest debate over stimulus in Washington, Monday's rally was driven by outsized strength in the mega-cap technology stocks, with the NASDAQ 100 Index rallying more than 3% on the session. While market attention in recent weeks has centered around politics, expect corporate fundamentals to also come back into focus as third quarter earnings season kicks off this week, with a host of US banks scheduled to report earnings before the opening bell on Tuesday.
• Ten of the 11 S&P 500 sectors were higher, with Information Technology (+2.7%) and Communication Services (+2.4%) outperforming the broader market, while Energy (+0.3%) and Materials (-0.2%) lagged.
• Bond markets were closed on Monday in observance of the federal holiday. The US dollar was little changed in Monday's trading, while gold and oil prices fell modestly.

US stocks traded sharply higher on Monday as the S&P 500 gained 1.6%. Stocks drifted higher throughout much of the session on little news, though gains were pared in the final hour of trading. With Monday's rally, the S&P 500 traded back above 3,500, and sits just 1.5% below the all-time high from early September. Monday's strength was driven largely by gains in the mega-cap technology stocks, with the NASDAQ 100 rallying more than 3% on the day. While there was no obvious headline to point to for the strength in big tech, two of the largest index constituents are holding company-specific events this week, and perhaps enthusiasm ahead of these events contributed to the rally. Apart from the technology sector, gains were more modest, with six of the 11 S&P 500 sectors rallying less than 1% on the day. Outside of equity markets, trading was relatively quiet, with US bond markets closed in observance of the federal holiday. Looking ahead, corporate fundamentals should be in focus this week as third quarter earnings season kicks off in earnest with a host of large-cap banks due to report results on Tuesday morning.

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.