3 observations about the stock selloff

Stocks are sliding in September. What’s behind the selloff?


Our Top Market Takeaways for September 25, 2020.

Markets in a minute: 

The S&P 500 (-2.2% on the week through Thursday’s close) is on pace for its fourth consecutive week of losses, a streak we haven’t seen since August 2019. We didn’t even have a selloff of this duration during the height of the COVID crisis (but the magnitude of the selloff has not nearly been as dramatic). By now, the S&P 500 and the NASDAQ 100 are well below their all-time highs (-9.3% and -12.3% respectively). In case you’ve forgotten, those highs were made only about three weeks ago.

Looking under the hood, this pullback started with mega-cap technology and tech-adjacent companies, which are the same ones that have driven positive returns for investors this year. At the moment, FAAMG names [Facebook, Amazon, Apple, Microsoft and Alphabet (aka GOOGL)] are all down at least 10% from their highs. However, growth started to turn a corner this week as a relative outperformer. Info Technology (-0.3%) and Consumer Discretionary (-0.3%) led the way, while cyclicals like Energy (-8.5%), Materials (-5.4%) and Financials (-5.3%) took a tumble.

Ultimately, a pullback following such an extended rally shouldn’t come as a surprise. Volatility is normal and investors should not let it derail their plans. Remember, even after all of this, the S&P 500 and NASDAQ 100 are +11% and +41% over the last year, respectively.

Beyond the markets, here are some news items we thought were notable this week:

  • Stimulus – Early this week, Powell took to the stage and continued to reinforce the Fed’s “do whatever it takes” mantra, while at the same time stressing the need for additional fiscal stimulus to cushion the blow from the pandemic. However, stimulus talks stalled in August and it looks unlikely that another stimulus package will be passed prior to the election, despite some smoke signals from House Speaker Pelosi and Treasury Secretary Mnuchin that there is still time.
  • Politics – There is no shortage of news coming from Washington. One headline that stood out was that the House was able to pass a short-term bill earlier this week to avoid a government shutdown, which was expected. There is also a consistent narrative developing that the election may be beset by delays and disputes in the days and weeks after November 3.  We think it is possible that this election could see more volatility than normal. If you are worried, we encourage you to read our recent checklist for investors before Election Day.  
  • Economics – Many European countries have announced new restrictions and have slowed re-openings due to surging coronavirus cases. Eurozone Composite PMIs (our preferred high frequency growth metric) recovered quickly following April’s low, but have now fallen for the second consecutive month due to weakness in the services sector, which is now contracting again after momentarily reaching expansion territory. The virus will still play a large part in dictating the speed of the economic recovery globally. 

There is no shortage of bad news for markets this week, which makes it hard to determine what is causing the angst. To help, we put together three observations that contextualize the recent bout of volatility.

Three observations about the selloff

1. This week was different: Markets are starting to suggest anxiety about the growth outlook.

We have written many times that headline indices can mask important distinctions underneath the surface. From the beginning of September until the end of last week, the selloff was mainly a mega-cap tech and tech-adjacent story. It was easy to chalk it up to profit taking and pockets of excess in options markets. Technology, Communication Services and Consumer Discretionary (which includes Amazon) were the three worst performing sectors, while cyclicals like Materials and Industrials were in the green.

Those returns are not consistent with investors expecting a materially weaker outlook for the physical economy. Looking across assets showed a similar story. High yield and investment grade spreads weren’t budging, and European and Emerging market stocks (that have more exposure to “real” economic activity) outperformed those in the United States.

But then we got an important piece of “new news.” Ruth Bader Ginsburg’s passing reduces the chances of any additional stimulus until after the election. This week, you can see that cyclically sensitive sectors have been leading on the downside.

Likewise, high yield spreads have widened (which indicates more risk of default) and inflation expectations (which can proxy growth expectations) have fallen.

2. Core bonds are offering some protection against equity volatility, but it’s time to expand the toolkit.

While the S&P 500 is down -7.2% so far this month, long-term Treasury bonds are up +1.5% and investment grade and municipal bonds are flat. This is important for multi-asset investors. Core bonds are still protecting against equity volatility, but that protection doesn’t seem to be quite what it once was. In the post-GFC period, the average 20-year-plus Treasury Index return in months when the S&P 500 was down over -5%, was +5.5%

We think it can be beneficial to look for other opportunities to navigate volatility. Dividend payers are flat in September, as are Hedge Funds (based on the HFR Global Index). Further, several active managers that we rely on to navigate volatility have outperformed.

3. Tech may be starting to turn a corner.

Mega-cap tech has lost the most, but there are some signs of stabilization. The tech sector is the best performing sector in the S&P 500 this week. Since Monday morning, the Nasdaq 100 is up +2%, and Apple and Amazon, two of the worst performing stocks in the market in the month of September, are both +5% higher. In fact, every FAAMG stock (defined earlier) is outperforming the market this week. This isn’t to say the worst is over, but it is nice to see some signs of life in the space that has been at the root of the market’s problems over the last few weeks.

In the end, it seems to us like we are in a rough patch for the equity market, something akin to the nine corrections of between -7% and -20% that we saw in the bull run following the Global Financial Crisis. Nothing about the powerful macro drivers, the Fed or the economic recovery, have changed all that much this month (with the exception of the prospects for near term fiscal stimulus). Indeed, we are taking advantage of the correction and adding equities in the multi-asset portfolios that we manage. At current levels, U.S. equities seem to offer a compelling potential return relative to other asset classes (U.S. investment-grade bonds yield 2.55%). This isn’t an “all clear” flag (there is no such thing for investors), but the backdrop remains supportive for risk.

All market and economic data as of September 2020 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.


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All market and economic data as of September 2020 and sourced from Bloomberg, FactSet and Gavekal unless otherwise stated.

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