Weekly Market Update — October 6, 2020

• The U.S. equity markets shook off the September swoon and started October off by ending the losing streaks of the past few weeks
• The DJIA led the way with a gain of 1.9%, while both the S&P 500 and NASDAQ moved up 1.5%
• The small–cap Russell 2000, by contrast, more than doubled the sister large-cap indices and leapt 4.4%
• Of the 11 S&P 500 sectors, 10 were green and one was red, with the Energy sector losing 2.9% as oil prices dropped by about 8%
• The Real Estate sector jumped almost 5% and the Financials and Utilities sectors were both up over 3%
• The last trading day of the week was full of news, especially the pre-market announcement that President Trump and First Lady Melania both tested positive for COVID–19, sending pre–market futures lower to start the day, although things improved a bit from the opening bell
• Also on Friday, September nonfarm payrolls increased by 661,000, which was below expectations of closer to 800,000
• West Texas Intermediate Crude dropped to $37.05/barrel, with most of the week\’s decline happening on Friday
• The 2–year Treasury yield was flat on the week and ended at 0.13% while the 10–year yield increased four basis points to 0.70%
• The U.S. Dollar Index fell 0.9% to 93.84

*Source: Bonds represented by the Bloomberg Barclays US Aggregate Bond TR USD. This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

There have not been too many weeks over the past year when small–caps dominated their larger–cap counterparts, but this week was a trouncing with the Russell 2000 more than doubling the DJIA, S&P 500 and NASDAQ on the week. Even better news was that the inconsistent large–cap returns over the past month turned around this week and ended very positive.

Small-Cap Cyclicals Led Through Uncertain Times

3Q20 Russell 2000 Returns by Sector as of 9/30/20 (%)

In addition to the news on Friday about President Trump and First Lady Melania, the other piece of news that hung over the markets was the monthly report on jobs and payrolls.

• The good news is that there were over 660,000 jobs added in September; the not–so–good news is that most expected that number to be more than 800,000
• The good news is that employment within the leisure and hospitality sectors increased by 318,000; the not–so–good news is that government employment dropped by 216,000
• The good news is that the number of Americans filing for unemployment reached a post–pandemic low; the not–so–good news was that the number of those filing for unemployment is a staggering 837,000

This week also brought the end to September and the third quarter and the divergence in returns could not have been more pronounced. In a nutshell, September saw all the major indices, sectors and asset classes retreat on the month whereas the third–quarter saw the opposite.

By the time the third quarter closed, investors saw that:

• The DJIA ended the third quarter up 7.6%
• The S&P 500 ended the third quarter up 8.5%
• NASDAQ ended the third quarter up 11.5%

It should be noted that the positive third quarter came after what many will see as validation of that September Swoon theory – when the month of September doesn\’t treat equities particularly well. In fact, this past September, we saw global equity markets reverse course, halting the five straight positive months enjoyed by U.S. equity markets as:

• The DJIA finished September down 2.3%
• The S&P 500 finished September down 3.9%
• NASDAQ finished September down 5.2%

In addition, consider how opposite the month of September and the third quarter were:

• For the month of September, all 35 of the MSCI regional indices were negative
• For the third quarter of 2020, all 35 of the MSCI regional indices were positive
• For the month of September, 10 of the 11 S&P 500 sectors were negative (Utilities was positive for the month)
• For the third quarter of 2020, 10 of the 11 S&P 500 sectors were positive (Energy was negative for the month)

Consider these eye–popping price increases:

• The median existing–home price for all housing types in August was $310,600, up 11.4% from August 2019 ($278,800), as prices rose in every region.
• Existing–home sales in the Northeast jumped 13.8% in August and the median price of $349,500 was a 10.4% increase from a year ago.
• Existing–home sales in the Midwest increased 9.3% from a year ago and the median price of $246,300 was a 10.7% increase from a year ago.
• Existing–home sales in the South rose 13.0% from a year ago and the median price of $269,200 was a 12.3% increase from August 2019.
• Existing–home sales in the West leapt 9.6% from a year ago and the median home price of $456,100 was a 11.8% jump from August 2019.

On Wednesday, the Commerce Department reported that its “Third Estimate” of 2Q2020 GDP improved marginally to a decline of 31.4%. But saying it improved marginally seems disingenuous on its face because this 30%+ decline is on the heels of the 5% decline in the first quarter. And whether the number is 31.4% or 32.9%, it’s still the worst quarterly decline in history – by a long shot.

On October 29th, the Commerce Department will release the “Advance Estimate” for Third Quarter GDP and it\’s generally expected that GDP will rise at a historic rate, with some predicting 3Q2020 GDP numbers north of 30%. That would be the highest GDP gain of all time (previous record was about 16%).

• The pan-European STOXX Europe 600 Index gained 2.02%
• Germany\’s Xetra DAX Index gained 1.76%
• France\’s CAC 40 gained 2.01%
• Italy\’s FTSE MIB gained 1.96%
• The UK\’s FTSE 100 Index gained 1.78%
• The Nikkei 225 Stock Index lost 0.75%

bea.gov; dol.gov; fidelity.com; msci.com; nasdaq.com; wsj.com; morningstar.com;