COVID-19 Market Update: Markets Take a Breather Following Weeks of Gains
After several weeks of substantial gains, the equity markets, in general, took a breather with some profit-taking in the largest of tech names after a historic run-up since mid-March. In reviewing the events of the week, it is hard to identify a trigger. While markets declined Thursday and Friday, the S&P 500 remains in positive territory year-to-date, up over 6.1% after losing 2.3% for the week. The Nasdaq is up 26.09% year-to-date after dropping 3.27% in the week. The broader-based Russell 2000 declined 2.67% in the week, bringing the year-to-date loss to 7.93%. In Canada, the TSX struggled, giving up 2.8% in the week and staying negative year-to-date at 4.9%. In Europe, the equity markets followed North America with a weekly decline. Interestingly, the Japanese equity market advanced 1.4% during the week.
On the economic front, the US Labor Department monthly non-farm payroll report showed employers adding over 1.4 million new jobs in August, reducing the unemployment rate to 8.4% from July’s 10.2%. Since March and April, almost half of the jobs lost have been recovered. However, initial unemployment claims are elevated at a seasonally adjusted 881,000 compared to the pre-COVID 220,000 weekly average.1 In Canada, the unemployment rate fell to 10.2%, with 246,000 new jobs. Worth noting is the decline in the rate of job growth in recent weeks as, in some locations, increasing infection rates are stalling re-opening and, in some cases, reversing re-openings.
Almost every analyst mentions the concentration of the leadership in US equities. The top five stocks in the US represent 24% of the index and are responsible for almost all index performance. At the start of the year, it was about 18%. Growth stocks continue to outperform value with momentary exceptions like last week when value, while declining, modestly exceeded growth. The average stock is still down 5% to 7% and is attracting attention as earnings slowly return. If the past is any indication, there is an expectation of a rotation from growth and tech stocks to value names in a typical environment. Today we are faced with anything but a typical environment. We are not in a normal business cycle contraction; instead, we are in an environment motivated by fear of a health crisis. We were already slowly moving into a digital world that, as a result of COVID, has accelerated at a pace unseen since the Great Depression of the 1930s when farm mechanization forced a significant segment of the population into the unemployment lines. Thankfully, today, western governments and Central Banks have risen to the occasion to soften the blow. However, it appears the health concerns are not going to disappear any time soon, and technology will have to provide the automation catalyst for many businesses to survive. This trend to automation may provide the rotation broadening market breadth. Nevertheless, it will take time, and volatility will appear as investor sentiment rotates from time to time.
As we head into the US election, investor sentiment will have the additional factor of the uncertainty of the integrity of the election results. This election will be unlike any election ever seen in US history. No matter who wins, it will cause resentment and further polarize the country. It is likely to be an additional source of market volatility.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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