Market Update - September 14th, 2020
On a holiday-shortened week, economic data included a tick upward in producer and consumer inflation, although levels remain tempered. Employment data remained mixed.
U.S. equity markets declined last week, as profit-taking in certain higher-growth stock groups continued. Foreign stocks outperformed domestic stocks slightly, along with improved economic prospects. Bonds gained due to inflows from riskier assets, led by investment-grade debt. Commodities were mixed to lower, as priced for crude oil and natural gas continued to show weakness.
The equity sell-off from the prior week continued past Labor Day, with the tech- and healthcare-heavy Nasdaq experiencing one of its quickest (3-day) -10% corrections in history. This appeared to be due to investors rotating out of stronger-momentum tech names toward more conventional large cap core. This negative trend slowed by mid-week, although mixed intraday results continued. By sector, materials ended the week as the only segment with positive returns, while energy, technology, and communications services all experienced declines in the low single-digits. Real estate also fell back by several percent for the week.
Some of the weakness in sentiment may have also been affected by the decelerating likelihood of a large Congressional stimulus package before the election, as well as the pause in AstraZeneca’s Covid vaccine trial, due to an unspecified unfavorable result being investigated (rumor has it that it might be an unrelated issue, but markets are touchy these days, nonetheless). Additionally, the larger that certain individual names become in an index (5% specifically), there could be an impact on reporting requirements for regular diversified mutual funds and other investment vehicles—which could be a reason for stock weightings around this level getting ‘capped’ through market movements.
Foreign stocks were mixed by country last week, with developed markets generally experiencing gains, while emerging markets declined by just short of a percent. Sentiment was a bit stronger abroad, with economic growth looking better by several metrics; this was despite the ECB not providing additional stimulus as hoped, as well as continued rising infections in several countries. Chinese improvements in exports were offset by continued weak sentiment around U.S. restrictions on technology operations, which resulted in sharp equity declines.
U.S. bonds gained with the movements in flow away from risk assets, causing a decline in interest rates. Longer-duration treasuries fared best, followed by investment-grade corporates. Floating rate bank loans also gained. Developed market foreign bonds were flat on the week as the U.S. dollar strengthened, while emerging market bonds lost ground.
Commodities generally fell across the board, along with weaker risk assets and a stronger dollar. Lower energy prices overwhelmed nominal change in other groups, largely with natural gas spot prices falling over -12%, due to lower demand and a correction backward from a prior hurricane-related spike. The price of crude oil declined by -6% to just over $37/barrel, in a continued reaction to Saudi price cuts in order spur better demand.