The 1% Move Report

Wealth Management — November 5, 2020

• US stocks traded sharply higher Thursday as the S&P 500 rose 1.95% to close at 3,510. With the rally, the index is now up 8.7% on the year to date.
• The S&P 500 had its fourth straight day of gains as the index has now fully retraced last week's nearly 6% loss. Thursday's rally comes as the market continues to digest the preliminary results of this week's US election. While Wednesday's 2%+ index rally was largely concentrated in healthcare and technology/internet stocks, Thursday's rally was broad-based with more than 80% of S&P constituents ending higher on the day. Treasuries, which rallied sharply the prior day, were little changed with markets reacting only slightly to Thursday afternoon's Fed announcement, which went largely as expected.   
• Ten of the 11 S&P 500 sectors were higher, with Materials (+4.1%) and Information Technology (+3.1%) outperforming the broader market, while Health Care (+0.2%) and Energy (-0.4%) lagged.
• Rates were little changed across the curve, with the 10-year Treasury rate edging slightly higher to 0.77% as of the 4 p.m. equity market close. Gold was 2.5% higher, while WTI oil moved lower to just below $39 per barrel; the US dollar weakened modestly in the trading session, as measured by the US Dollar Index.

US stocks traded higher on Thursday as the S&P 500 gained 1.95%. This now marks the fourth consecutive rally for the S&P 500, with the index having recovered all of last week's decline. While the Presidential election is still too early to call, this week's market rally has likely been driven by two factors: 1) it would appear likely that Congress will remain split with the House of Representatives remaining under Democratic control while the Senate is likely to stay Republican; and 2) while election results have been delayed, it would appear results are on track to be known within the next 24-48 hours. While Wednesday's rally appeared to have markets pricing in the 'gridlock' Congressional outcome, with Treasuries rallying and beneficiaries of policy gridlock leading the equity market higher, Thursday's equity rally was more broad based. Treasuries were little changed in Thursday's trading, with the 10-year Treasury yield settling near 0.77%. Looking ahead, outside of the continued trickling in of election results, markets will be focused on Friday's October jobs report, which will provide the latest read on the US labor market. 

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.