Equity markets fell for the third-straight week, led by the continued correction in tech-heavy names that had led the rally since March. Despite the dramatic decline earlier this year, the S&P 500 IndexTM has not seen a three-week losing streak in nearly a year, and currently trades at the lowest level since early August. Context is important, however, as the S&P 500 enters the week just 7% below the record high and nearly 50% above the March low.
The reversal of recent trends continues, with value indexes outperforming growth, small caps beating large, and international leading domestic. Several technical indicators reflect the stress, as strong momentum that was reinforced by aggressive call option buying by retail investors has broken down, as the S&P 500 broke below the 50-day moving average for the first time since April. Equities lack a catalyst, as the fuel of fiscal and monetary policy is fading, economic data has become increasingly choppy, and earnings season is not set to begin for several weeks.
The technology sector has led the decline, as the breakdown in momentum, retail investor swings and elevated valuations has some comparing the environment to the technology bubble of the late-1990’s. Aside from a few highly-valued names, the comparison is flawed, as the degree of overvaluation is widely different, and the quality of the market leaders’ profitability, diversification of the revenue base and strength of the cash flows and balance sheet are dramatically improved.
The next phase of stimulus appears more elusive than ever given the passing of Supreme Court Justice Ginsburg and the looming fight over her replacement. President Trump has said he would nominate someone this week, setting up an inevitable partisan divide. This will further complicate the process that was already fraught with challenges and will likely consume D.C. through the election. Three Republicans have indicated unwillingness to proceed in a confirmation this year, setting up a potential 50/50 tie, which would result in Vice President Pence acting as the tie-breaker. Democrats have threatened to stall Senate proceedings to delay a vote and the House has hinted at another impeachment proceeding. There is also discussion of retaliation if the Republicans move forward with confirmation and lose the Senate in November, including expanding the number of seats on the Supreme Court and eliminating the filibuster. This increased partisanship comes as a funding deal needs to be reached by next week to avoid a government shutdown just over a month before the election.
The back-and-forth with China entered a new phase this weekend, with the U.S. Commerce Department banning U.S. transactions using WeChat and TikTok. China is expected to retaliate by naming at least one U.S. company to its ”Unreliable Entities List” in coming days, furthering the tension between the two sides. While the relationship between the U.S. and China continues to deteriorate ahead of the U.S. election, there is a growing belief that the fight with China is increasingly bi-partisan.
Coronavirus cases remain stubbornly high, registering nearly 40k on Sunday, stoking fears that we are facing a rebound with 31 states at a rate indicating an expanding pandemic. Case numbers are gaining momentum in Europe, with France and Spain exceeding the numbers from the Spring, concentrated among young people, though politicians have largely ruled out a fresh lockdown.
What to Watch
The slate of economic data is modest next week, highlighted by existing home sales on Tuesday, PMI data on Wednesday, new home sales on Thursday and durable goods on Friday.
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