Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services
Weekly Market Performance Snapshot (Week ending November 13, 2020 / Year-to-Date)
- Dow Jones Industrial Average®: +4.1% / +3.6%
- S&P 500® Index: +2.2% / +11.0%
- NASDAQ Composite® Index: -0.6% / +31.8%
- Russell 2000® Index: +6.1% / +4.5%
- 10-year U.S. Treasury note yield on November 13, 2020: 0.893%
- Up 7.1 basis points from 0.822% on November 6, 2020
- Down 102.7 basis points from 1.92% on December 31, 2019
- Best-performing S&P 500 sector this week: Energy, +16.5%
- Weakest-performing S&P 500 sector this week: Consumer Discretionary, -1.1%
Past performance is not a guarantee of future results.
Stocks surge on vaccine news, offering glimpse of future rotation
On Monday, Pfizer (along with its German partner, BioNTech) announced that its COVID-19 vaccine was 90% effective in human trials and that it expects to ask for emergency use authorization this month. The news boosted optimism about the timing and strength of the economic recovery. Equities pulled back mid-week, as concerns lingered about the ongoing wave of coronavirus cases and hospitalizations in most parts of the U.S. and Europe. The major indices then rallied to close the week. The broad-based S&P 500 Index and the small-cap Russell 2000 Index reached all-time closing highs.
- Most sectors benefited from the spike in equities at the beginning and end of the week. There was a rotation at the top, as value sectors that have lagged the market throughout the pandemic, including Energy, Financials, and Industrials, saw the biggest moves. Travel and leisure stocks, including airlines and casinos, also benefited. This market action may portend a longer-lasting rotation that may occur once the economy is on firmer footing and COVID-19 concerns have eased.
- Technology stocks, particularly those that have benefited from the stay-at-home economy, took a hit in the mini-rotation, as investors assumed that a return to normal economic conditions could clip the companies’ longer-term growth prospects. Zoom Video Communications, the stock perhaps most associated with working at home, declined more than 19% for the week.
- Despite tech’s bumpy ride this week, a rotation in stock sectors doesn’t necessarily mean that tech and other growth stocks have to fall. A lot of cash is currently on the sidelines and could be directed into value stocks without taking money out of growth stocks. However, concerns about overly high valuations of some tech stocks could cause investors to take gains and redeploy capital elsewhere.
- In addition to Pfizer’s encouraging vaccine news, Moderna announced on Wednesday that its vaccine candidate now has enough data to begin initial analysis by an independent monitoring board. On Friday, Dr. Moncef Slaoui, the chief scientific advisor to the U.S. government’s Operation Warp Speed vaccine-development effort, said potentially two vaccines could be approved by the end of the year. Logistical and supply challenges mean that it will be several months before a vaccine is widely distributed to the public. As Dr. Fauci noted this week, “Help is on the way, but it isn’t here yet.”
- The market always looks to the future. Right now, it’s weighing two different futures. The near-term future (over the next few months) is highly uncertain, with virus cases expected to continue at a high pace and stimulus prospects cloudy. A bit of post-election uncertainty is still in the mix too, as President Trump pursues legal challenges to the results and the nation awaits the outcome of the Georgia runoff elections on January 5 that will determine control of the U.S. Senate.
- The longer-term future looks more promising to markets. Stimulus, even if smaller than once anticipated, is likely to pass at some point, either before or after a new Congress and president are sworn in. Successful vaccine deployment will also lay the groundwork for a more permanent return to normal economic activity. However, it’s important to reiterate that the path forward for both stimulus and vaccines isn’t entirely clear. Unexpected disappointments on either front could lead markets down.
Jobless claims and bond yields complicate the picture for policymakers
The latest reading on weekly new jobless claims revealed a continuing decline to 709,000. More than 21 million Americans are still receiving some form of unemployment assistance, either through regular state programs or special pandemic-related programs.
- The steady decline in new claims could dampen momentum for additional stimulus, particularly among policymakers who favor allowing the economy to continue recovering on its own. On the other hand, the current virus resurgence is beginning to lead to localized restrictions on economic activity, so other policymakers may see increased urgency for action.
- Meanwhile, market optimism about longer-term economic prospects lifted Treasury bond yields. The 10-year yield rose to 0.97% before settling at about 0.89% for the week—a rise of 7 basis points—while the yield on the 2-year Treasury note rose a more modest 2.5 basis points for the week.
- The Federal Reserve can exert more control over shorter-term yields (two years and under) than over the 10-year yield, which is driven more by market sentiment and longer-term inflation expectations. The 10-year yield is the benchmark that most impacts consumer lending, including mortgages. If the rise in the 10-year yield continues, the Fed may consider taking more aggressive action to keep the yield low and prevent undermining the nascent economic recovery.
- The Federal Reserve continues calling for more fiscal stimulus. Chairman Jerome Powell recently warned that without additional support, the economy could see “scarring” in several forms, including “unnecessary business bankruptcies, unnecessary household bankruptcies, and unnecessary long-term stays of unemployment”—all of which need to be avoided.
- As several European countries endure COVID-related lockdowns, European Central Bank President Christine Lagarde pledged ongoing monetary support from the bank: “A continued, powerful, and targeted policy response is vital to protect the economy, at least until the health emergency passes and vaccination is well advanced.”
- In other global news, China’s government announced a more aggressive posture to regulating large tech companies. This came days after the Chinese government halted the planned record-setting IPO of Ant Group, an online payments firm that grew out of Alibaba. Several major Chinese tech firms—including Alibaba, Tencent, JD.com, and Baidu—are included in many international investment funds, so stricter regulations that limit the growth of these companies could impact investors worldwide.
Final thoughts for investors
This week foreshadowed how markets may respond to a post-pandemic economy. Many value sectors finally got some wind in their sails, as technology companies lost steam. While vaccine distribution plans and economic growth are still highly uncertain at this time, we may be getting closer to a new phase of the economic recovery. If you have questions about how you’re positioned for the future, speak with a financial professional.