Weekly Market Update (August 31 – September 04, 2020)
By: Craig Fehr, CFA September 04, 2020
The equity markets saw volatility return last week, with Thursday seeing declines of 3% and Friday 1%1. Before this last week, the S&P 500 advanced for four straight weeks, with technology stocks leading the index to a new record high. The strength of the stock market, though, seemingly disconnected from current economic fundamentals, has been supported to date by aggressive fiscal and monetary stimulus and stronger-than-expected economic indicators of future growth. The Department of Labor released data last week showing initial jobless claims coming in at 881,000, beating analysts’ estimates. The economy also added 1.4 million jobs in August, with 10.1% growth in productivity. On the trade front, the U.S. deficit reached a 12-year high.
2020’s Remarkable Figures: Where Are They Now?
We’re two-thirds of the way through 2020, but the year so far has produced more than its fair share of extraordinary statistics. With Labor Day bringing the unofficial end to an unusual summer, here’s a look back at this year’s unusual figures and where they are now:
- -12% and +9% daily moves: While market volatility increased sharply this year, it was particularly notable in March, which included a single-day decline of 12% — the second-worst day in the last 50 years – as well as two 9% daily gains (the third- and fourth-best days) a handful of days apart1.
- Where is it now? After bottoming in late March, the stock market has been on a steady path higher, with relatively modest fluctuations along the way, including only 22 daily moves larger than 2% during that time. Last week saw a return of volatility, with the market falling 3% on Thursday, as many of the higher-flying segments of the market, such as tech stocks, sold off following a lengthy winning streak1. We don’t see this as the beginning of a new broader direction lower for the market, but instead a more normal (and, in our view, healthy and necessary) breather for a market that has been on quite a run.
- –35% market drop, 23 days: The stock market fell nearly 35% earlier this year as the market quickly priced in the effects of the budding global pandemic1. While 35%-plus market declines are not extremely rare – there have been five of them in the past 75 years – this was the first bear market in more than a decade. Moreover, it was the speed of this bear-market drop that was particularly unique, taking place in just 23 days. For perspective, historical 35% declines took an average of 348 days1.
- Where is it now? The stock market’s sharp sell-off has been countered by an equally vigorous rebound. Even with last week’s small stumble, the S&P 500 is up more than 50% from the March low, having returned to new all-time highs in recent weeks1. This is the first time since 1945 that the market has experienced a drop of more than 25% and a rally of 50% in the same calendar year1. The relentlessness of the rally over the last five months has been impressive and reflects expectations for a rebound in economic growth and corporate profits over the next few years. We share this outlook, but we don’t think it will transpire in as steady a fashion as the rapid rise to record highs might suggest. We don’t think the new bull market’s gains are exhausted, but volatility and periodic hiccups should be anticipated as we advance.
- 15% unemployment: Amid the economic shutdown, the U.S. unemployment rate went from a half-century low of 3.5% to 14.7%, the highest unemployment rate during the last 75 years, surpassing the previous high in 1982 and double the recessionary peaks experienced during the ’50s and ’60s1.
- Where is it now? The good news is that the unemployment rate has come down notably, falling to a current rate of 8.4%. On the other hand, even after this improvement, it is still quite high, sitting only modestly below where the unemployment rate peaked during the height of the Great Recession in ’08/’09, indicating the significant amount of labor-market damage that is still in need of repair. To that end, August’s employment report released last week was encouraging, showing ongoing improvement with an additional 1.4 million jobs created last month. We’d note that 6.5 million new jobs were created over June and July, indicating that the pace of improvement has slowed more recently, which we attribute to the setbacks in reopening many segments and geographies of the economy. We think the labor market will continue to heal, but a return to unemployment near pre-pandemic levels will, in our view, take an extended period of time.
- -32% GDP: The U.S. economy posted its largest quarterly decline in GDP in the second quarter, contracting by an annualized rate of 32%, more than triple the decline of the previous worst quarter post-WWII (first-quarter 1958) and four times larger than the worst quarter during the ’08/’09 financial crisis1.
- Where is it now? Economic conditions have improved notably. The combination of the incremental reopening of the economy and government stimulus checks to households has supported a healthy rebound in spending, which could produce the largest quarterly rise in U.S. GDP in the third quarter (the best quarter on record is +16.7% in 1950)1. Retail sales have returned to pre-crisis levels and the housing market has been strong, encouraging signs for household consumption, which accounts for 70% of U.S. GDP1. There is still a long way to go, however, as the economy is a long way from firing on all cylinders. After the initial rebound in the third quarter, we think the economy will continue to expand, but at a much more gradual pace, as still-high unemployment and incremental challenges in fully reopening the economy restrain growth. As the 2009-2019 period demonstrated, even modest economic growth (as long as it’s persistent) can be a constructive environment for the market. We expect a sustained economic expansion to be a necessary and supportive foundation for market performance over time.
- -$37 oil price: This one probably takes the cake for the most remarkable number of the year, as oil prices briefly fell into negative territory in April. This was primarily a result of technical factors in the oil market (futures contracts, storage availability), but was symptomatic of suffering global demand conditions and extreme market volatility during the brunt of the pandemic.
- Where is it now? Oil prices have risen notably since their brief stint in negative territory, currently sitting above $40 per barrel1. While ongoing supply-and-demand dynamics will govern commodity prices over time, oil’s rebound to levels seen in March is indicative of broader expectations for gradually improving global demand relative to the depths of the crisis earlier this year.
- 18% of S&P 500 in the top-five names: At the beginning of this year, the five-largest stocks in the S&P 500 represented roughly 18% of the index’s market capitalization1. This was up from about 12% three years prior, reflecting strong growth and performance among many of the large technology companies in recent years.
- Where is it now? Leadership from the mega-cap technology names has continued to accelerate this year, with the top-five names (Apple, Microsoft, Google, Amazon and Facebook) now constituting more than 24% of the S&P 500’s market cap1. This demonstrates that the stock-market gains have come from somewhat more narrow leadership, as the median stock in the S&P 500 is still, on average, notably below its previous high. Positively, this suggests broad market valuations are not stretched as recent performance might suggest, leaving further room for stocks to move higher over the broader term. While the increased concentration in the largest five stocks may make the market more vulnerable to short-term swings if those names experience some weakness (last Thursday’s dip was an example of this), this is not unprecedented. In the late ’90s, the top-five stocks (GE, Microsoft, Cisco, Walmart and Intel) were more than 18% of the index, and in the early ’80s, the five largest stocks made up more than 21% of the market1. Over time, we expect leadership to rotate among asset classes and sectors, highlighting the importance and value of balance and diversification in your portfolio. We believe this can help best position you to navigate shifts in investment conditions as well as bouts of volatility that are likely to emerge along the way.
Craig Fehr, CFA
Source: 1. Morningstar 2. U.S. Bureau of Labor and StatisticsINDEXCLOSEWEEKYTDDow Jones Industrial Average28,133-1.8%-1.4%S&P 500 Index3,427-2.3%6.1%NASDAQ11,313
26.1%MSCI EAFE*1,899-0.6%-6.8%10-yr Treasury Yield0.72%0.0%-1.2%Oil ($/bbl)$39.54-8.0%-35.2%
Source: FactSet, 09/04/2020. *4-day performance ending on ThursdayBonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.
The Week Ahead
Important economic releases this week include Consumer Credit, CPI data, and hourly earnings growth.