Market Review: Week Ending 9/18/2020
US stocks declined for the third consecutive week, as the S&P 500 Index fell 0.6% to a 6-week low of 3319.1 The S&P has now lost 5.4% over the last 3 weeks while the Nasdaq Composite has fallen 7.7%, as many of 2020’s best-performing Technology stocks have experienced profit-taking (Apple has declined 17% in September, though it is still up 45% YTD).1 While there are signs that the pace of the recovery has moderated (Retail Sales grew at a lesser rate in August vs. July and the weekly Unemployment Claims have been stuck in the 880k range1), we view the pullback in stocks as a necessary and healthy correction for a market that had shown signs of excess, rather than an economic event. In fact, cyclical sectors Industrials, Materials and Energy all gained more than 2% last week1 despite the fall in the Index, an unlikely occurrence if investors feared the economy. In fact, investors appear to be buying cyclicals by rotating out of Technology throughout September. However, with the ongoing impasse in Congress for the extension of unemployment benefits, we would not rule out the risk of a weakening economy as consumer sentiment remains depressed (last week’s University of Michigan’s Consumer Sentiment Index reached a 6-month high of 78.4, though far below pre-Covid levels of +1001) and consumers relied heavily on these benefits to sustain spending in May-July. Chairmen’s Powell’s speech last week included a downbeat assessment of the recovery, though the Fed did lower their 2021 unemployment rate estimate and pledged to keep Fed Funds rate near zero until inflation is solidly above the desired 2% level, something not expected to occur until 2023. That assessment of the economy could be a factor in the slide in stocks, but credit spreads continued to fall after the speech,1 indicating the bond market isn’t overly concerned about the economy (or inflation) in the coming months. Through the close Friday, year to date results for the major indices are as follows: S&P 500 4.2%, Russell 2000 -7.0%, MSCI EAFE –4.5% and Bloomberg Barclays Aggregate Bond 6.9%.2
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Chad Roope, CFA®
Paul Danes, CFA®
1-Morningstar Direct 9/21/20