The 1% Move Report

Wealth Management — October 7, 2020

• US stocks traded higher Wednesday as the S&P 500 rose 1.7% to close at 3,419. With the rally, the index is up 5.8% year to date.
• The major averages have been alternating between gains and losses this week as markets react to the latest updates from Washington. While on Tuesday, a late-session sell-off materialized following a surprise announcement from the White House that stimulus negotiations would be put on hold until after the election, markets recovered overnight and into Wednesday following subsequent reports that certain stimulus measures may still be considered in the interim. Alongside the rally in stocks, rates moved sharply higher across the curve, with both 10-year and 30-year rates testing their highest levels since June.  
• All 11 S&P 500 sectors were higher, with Materials (+2.6%) and Consumer Discretionary (+2.5%) outperforming the broader market, while Utilities (+0.6%) and Real Estate (+0.3%) lagged.
• Rates were higher across the curve, with the 10-year Treasury rate rising to 0.79% as of the 4 p.m. equity market close. Gold rose 0.5% to $1,887 per ounce, while WTI oil moved lower to just above $40 per barrel; the US dollar weakened modestly in the trading session, as measured by the US Dollar Index.

US stocks traded higher on Wednesday as the S&P 500 rose 1.7%. The S&P 500 closed near its highs for the day with stocks rallying steadily throughout the session. It has been a back-and-forth week for stocks as markets react to the latest updates in Washington. While on Monday stocks finished higher following positive updates on the President's health alongside growing optimism on a potential fiscal deal, on Tuesday, markets reversed sharply lower as stimulus hopes were seemingly dashed by the surprise announcement from the White House. Wednesday, however, appeared to bring renewed optimism following reports overnight that smaller stimulus measures may still be considered in the interim. While the back and forth over stimulus has contributed to market volatility in recent weeks and the timing of any bill is still very much in question, comments from lawmakers on both sides of the aisle in recent days suggest there is interest in doing more stimulus, and that may help explain why markets have been resilient even in the face of disappointing stimulus updates this week — it would appear markets still expect more stimulus but are acknowledging such action may not be taken until after the election or early next year.  In a week light on economic and corporate data releases, politics has dominated attention, and that is likely to continue with Wednesday night's Vice Presidential debate. However, next week expect fundamentals to come back into focus, as third-quarter earnings season kicks off in earnest.  

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.