Equity markets have seen their first four-week losing streak in more than a year, eclipsing the stretch that saw a 34% decline for the S&P 500 IndexTM in less than five weeks. Markets are set for their first decline since March, which follows the historic seasonal pattern. Since 1928, the S&P 500 has averaged a 1.0% decline during the month of September, the worst month of the year. October has averaged +0.4%, November +0.8% and December 1.3%.
The technology sector had led the decline for much of September but bounced last week and is set to continue the relative strength on Monday despite continued worries on the rebound in cases and the impact on the economy. Volatility remains elevated, and is likely to continue through the election, as investor emotion is heightened.
Before the market collapse in March and rapid rebound, sentiment and risk indicators in the market signaled the inflection. Recently, many of those metrics that reflected substantial optimism at the end of August have rapidly reversed. Credit spreads (investment-grade and high-yield) have moved to the widest level since July. The S&P 500 broke below the 50-day moving average for the first time since April, and new lows exceeded new highs on the NYSE for the first time since May. While these technical breakdowns may create nervousness among investors, a contrarian view says that the deterioration suggests that excessive expectations are no longer embedded, and investors have a more balanced approach.
Most monthly economic data points continue to beat expectations, including housing, PMI and durable goods data, suggesting the economy remained in growth mode through August. Several high-frequency data points, however, indicate that the economic rebound enjoyed since April is showing signs of stalling. Initial and continued unemployment claims remain stubbornly high, small business surveys show concern over hiring and the prospect for increasing failures. Traffic at service-related businesses, such as gyms, restaurants and other close contact businesses has slowed, and usage of airlines and public transportation has declined. The fading impact of stimulus and the renewed uptick in cases are to blame. Current consensus shows real GDP growth of 25% in the third quarter and 6% for the fourth quarter.
Prospects for a bipartisan stimulus agreement continue to fade, with the House Democrats planning a fresh package in the $2.2 to $2.4 trillion range, which would include unemployment benefits, direct payments, small business loans and airline aid. The bill is seen as a primarily political process, as House Speaker Pelosi has expressed the need to deliver a message to voters ahead of the election. The White House has set the maximum deal size at $1.3 trillion, and Senate Republicans have suggested that they want a much smaller number. Federal Reserve officials called for additional fiscal stimulus this week, as the Fed has limited additional options for monetary stimulus. Partisan wrangling is set to accelerate, with Senator Graham set to begin hearings on President Trump’s Supreme Court Nominee Amy Coney Barrett on October 12.
The dollar index has rebounded 3% this month and is at the strongest level since late July, acting as a headwind for domestic returns. The rising coronavirus cases in Europe and the uncertainty surrounding November’s elections are the primary culprits. Several European governments have announced heightened lockdown restrictions or slowing re-openings, causing worry about a double-dip recession. This was reinforced by a sluggish reading on services PMI, bringing the composite to 50.1, a three-month low and indicating marginal expansion. For September, however, the MSCI EAFE and Emerging Market Indexes have outperformed the S&P 500 by roughly 4%.
What to Watch
The close of the third quarter this week could bring some volatility as institutional investors adjust positioning. Economic data include consumer confidence on Tuesday, revised second-quarter GDP and pending home sales on Wednesday, PCE inflation, personal spending and income and ISM data on Thursday, and consumer sentiment, durable goods and the closely-watched payroll report on Friday.
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