Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services
Weekly Market Performance Snapshot (Week ending September 4, 2020 & Year-to-Date)
- Dow Jones Industrial Average®: -1.8% / -1.2%
- S&P 500® Index: -2.4% / +6.0%
- NASDAQ Composite® Index: -3.3% / +26.1%
- Russell 2000® Index: -2.7% / -8.0%
- 10-year U.S. Treasury note yield: 0.718%, down 1.1 basis points from 0.729% on August 21 and down 120.2 basis points from 1.92% on December 31
- Best-performing S&P 500 sector this week: Materials, +0.8%
- Weakest-performing S&P 500 sector this week: Technology, -4.2%
Markets Carry Momentum into September, Then Retreat
Equity markets posted large gains in August, with the NASDAQ Composite up 9.6%, the Dow Jones Industrial Average (the "Dow") up 7.6%, and the S&P 500 up 7.0%. It was the S&P 500’s best August performance since 1986. The momentum continued into the first two days of September, as the S&P 500 and NASDAQ Composite continued to set new record highs, while the Dow crossed the 29,000 threshold. The indices then declined heading into the holiday weekend, with technology stocks and the tech-heavy NASDAQ Composite leading the retreat. The Dow returned to negative territory for the year.
- Market behavior since the March low has been driven by the Federal Reserve’s accommodative policies, expectations of a coronavirus vaccine by early 2021, and strong earnings results from technology and certain retail companies that have benefited from people working at home and using government stimulus payments to buy more consumer staple products.
- Reallocation among equity market sectors is taking place, as investors look for growth opportunities beyond technology stocks. Both the Industrials and Materials sectors posted double-digit returns during July and August. Industrials, which includes names such as FedEx and Deere & Company, rose more than 13.3%. The Materials sector, including Sherwin Williams and jar and can maker Ball Corporation, rose more than 11.8%.
- The decline in technology stocks late in the week suggests that investors may be realizing some of the gains achieved over the past six months. It’s unclear how investors will seek to redistribute these gains, and whether the reallocation will benefit other sectors that have been hard hit this year, such as Financials and Energy.
- Thursday’s selloff is another reminder that the future (the "Dow") direction of markets is far from certain. Investors should speak with a financial professional to discuss how they are positioned for a range of possible scenarios.
Economic Indicators Show Slow, Steady Improvement
The monthly employment report showed that the U.S. economy gained nearly 1.4 million jobs in August, with the unemployment rate falling to 8.4% from 10.2% in July. Weekly jobless claims also showed moderate improvement, with new claims falling below 900,000 for the first time since the pandemic took hold. While the numbers are improving, they are still historically high, and the pace of improvement has slowed since the large rebound in early summer.
- The Federal Reserve’s Beige Book, a regular report containing anecdotal evidence of economic conditions around the country, pointed to a potential labor shortage, even amid high unemployment. Childcare concerns are a main driver, as uncertainty around when students will be able to attend class fulltime is creating challenges for working parents.
- Two main sectors of the economy continue to grow: manufacturing and services. The Institute for Supply Management’s (ISM’s) manufacturing index came in at 56 for August, the highest reading since January 2019 and the fourth consecutive month of growth. ISM’s services index came in at 57 for August, slightly lower than July’s 58.1 reading, but still the third consecutive month of growth. Index levels above 50 indicate economic expansion.
- On Friday, Vice President Pence said that the White House and Congressional leaders agreed to separate the issue of further fiscal stimulus from the issue of funding the federal government for fiscal year 2021, which begins October 1. The agreement reduces the risk of a government shutdown. The effect on stimulus negotiations is unclear.
- The Congressional Budget Office reported that economic recovery and stimulus spending will push the national debt above 100% of GDP next year for the first time since World War II. While the current crisis clearly necessitates government support, higher debt levels could pose a challenge to future economic growth.
- All eyes continue to be on coronavirus vaccine progress. Pfizer’s CEO said the company could have results from its Phase 3 vaccine trial in October. Separately, the CDC issued instructions to states to be ready to distribute a vaccine by November 1. Markets seem to have priced in a vaccine being widely available by early 2021. A failure to meet those expectations could generate additional market volatility.