U.S. EQUITY MARKETS RETREAT FROM RECENT HIGHS AMIDST LIKELY PROFIT-TAKING AND BETTER THAN EXPECTED EMPLOYMENT DATA

  • The beginning of the week saw U.S. equity markets hit new highs, but momentum quickly shifted amidst profit taking and increased volatility, pushing the markets to give up most of their gains from the previous week
  • NASDAQ dropped the most, losing 3.3%, followed by the 2.7% decline from the small-cap Russell 2000, the 2.3% drop from the S&P 500 and the 1.8% decline from the DJIA
  • Of the S&P 500 sectors, the Energy sector was hit the hardest as it dropped 4.5%, but Information Technology was not far behind with its sizeable 4.2% pull-back
  • The defensive Utilities and Materials sectors were positive for the week, although each gained less than 1%
  • Volatility spiked this week by over 30% and ended at 30.75

Weekly Market Update – Sept 8, 2020

Close Week YTD
DJIA 28,133 -1.8% -1.4%
S&P 500 3,427 -2.3% 6.1%
NASDAQ 11,313 -3.3% 26.1%
Russell 2000 1,535 -2.7% -8.0%
MSCI EAFE 1,870 -2.1% -8.2%
Bond Index* 2,389.50 0.74% 7.39%
10-Year Treasury 0.72% -0.01% -1.2%

*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

  • After trading in a narrow range for most of August, West Texas Intermediate Crude dropped 7.6% and ended under $40 barrel
  • There was some positive news from the Employment Situation Report, as more jobs than expected were added, but the unemployment rate is still at an uncomfortably high 8.4%
  • The 2-year Treasury yield increased to 0.16% while the 10-year Treasury decreased one basis point to 0.72%
  • The U.S. Dollar Index advanced 0.5%

August Makes 5 Straight Positive Months (but September…)

Although markets dipped slightly on Monday, when the markets did close the books on August, investors were happy that global equity markets recorded a very positive August, pushing two of the major U.S. equity markets to new highs and recording five straight positive months as:

  • The DJIA finished August up 7.6%
  • The S&P 500 finished August up 7.0%
  • NASDAQ finished August up 9.7%

August will be remembered for the S&P 500 passing its pre-COVID level mid-month, hitting new highs later in the month and having NASDAQ reach new highs throughout the month as:

  • The DJIA recorded its best August since 1984
  • The S&P 500 recorded its best August since 1986
  • NASDAQ recorded its best August since 2000

Further, over the past 5 months, the S&P 500 is up 35.4% – its best five-month run since October 1938.

But then September came, historically the worst month for the stock market and as if on cue, things turned pretty quickly.

 

September Swoon in 2020?

As a point of reference, the “September Swoon” is a seasonal trend in the stock market and one that has been well documented by researchers and the press. The fact is, September has historically been the worst month on the calendar for stocks – from 1928 through 2019, the S&P 500 Index has fallen an average of 1.0% in September, according to Standard & Poor’s and Haver Analytics. February averages -0.1% and May averages -0.2%, the only other months with an average loss over those 90+ years.

It’s important to remember, however, that due to financial, psychological, and political factors, stock market behavior can run completely contrary to the seasonal trend in a given year (as it did in 2019, 2018 and 2017).

But, so far in September of 2020, this trend appears to be holding up as the week saw:

  • Volatility, as measured by the VIX, spike over 30%
  • Declines of about 3% on Thursday and 1% on Friday
  • And end to the string of four consecutive up weeks for the S&P 500
  • All the major U.S. equity indices declining on the week

 

Whether it was profit-taking after August closed, mutual fund managers window-dressing their month-end holdings or just a normal sell-off is up for debate. But the chorus of those suggesting that the markets were disconnected from fundamentals is certainly growing louder.

When the week was over, U.S. stocks were lower, with NASDAQ losing the most, although it has still recorded a sizeable YTD gain for investors. The S&P 500 and DJIA also retreated on the week and while the S&P 500 remained positive for the year, the DJIA slipped back into negative territory YTD.

 

Employment Situation Report

On Friday, the Department of Labor released data that showed the economy added about 1.4 million jobs, much more than most expected. Directly from the DOL:

“Total nonfarm payroll employment rose by 1.4 million in August, and the unemployment rate fell to 8.4 percent, the U.S. Bureau of Labor Statistics reported today. These improvements in the labor market reflect the continued resumption of economic activity that had been curtailed due to the coronavirus (COVID-19) pandemic and efforts to contain it. In August, an increase in government employment largely reflected temporary hiring for the 2020 Census. Notable job gains also occurred in retail trade, in professional and business services, in leisure and hospitality, and in education and health services.”

Further, the DOL reported that:

  • In August, the unemployment rate declined by 1.8 percentage points to 8.4 percent
  • The number of unemployed persons fell by 2.8 million to 13.6 million
  • Both measures have declined for 4 consecutive months but are higher than in February, by 4.9 percentage points and 7.8 million, respectively.

 

 

U.S. Manufacturing Continues to Expand

 

IHS Markit released its U.S. Manufacturing PMI (PMI) from responses to questionnaires sent to purchasing managers from over 800 U.S. manufacturers in August. The survey covers topics like new orders, output, employment, suppliers’ delivery times and stocks of purchases.

On September 1st, IHS Markit ran the headline screaming: “Fastest manufacturing expansion since January 2019” and then wrote the following:

“August data signaled a solid improvement in operating conditions across the U.S. manufacturing sector, with overall growth accelerating to the strongest since early-2019. The upturn reflected faster increases in output and new orders, with firms also indicating a renewed rise in employment. Moreover, companies registered the highest degree of confidence in the outlook for output over the coming year since April 2019 amid hopes of further growth of client demand.”

 

Construction Spending Remains Strong

On September 3rd, it was reported that:

  • Total construction spending during July 2020 was 0.1% above June’s spending and 0.1% below July 2019’s spending
  • During the first seven months of this year, construction spending amounted to $792.6 billion, 4.0% above the same period in 2019
  • Spending on private construction was up 0.6%
  • Residential construction was up 2.1%
  • Nonresidential construction was down 1.0%
  • Public construction spending was down 1.3%

 

Sources:

Cboe.com; Bls.gov; markiteconomics.com; fidelity.com; msci.com;

Nasdaq.com; wsj.com; Morningstar.com

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