Highlights
• Internal market dynamics are shifting: Mega-cap technology companies are declining notably, while other areas are holding up better, a notable reversal of the trend we have seen through much of 2020.
• Markets remain overbought, in our view, and we expect this rotation and selloff to continue over the near-term.
• This is a time for selectivity and focusing on relative value.
Stocks fell for a third straight week for the first time in nearly a year. Mega-cap technology stocks again fell notably, with several high-profile names dropping close to 5%.1 We appear to be beginning an unwinding of a trend that dominated much of 2020, when these same stocks drove markets to new highs. The cap-weighted S&P 500 Index has significantly outperformed the equal-weighted index this year, and we think the latter more accurately reflects an uneven recovery and several downside risks.1
10 Observations And Themes
1. Prospects for further fiscal stimulus are dimming. At this point, we think a major fiscal stimulus package before the election appears very unlikely. Should that be the case, a lack of extra unemployment benefits, additional support to small businesses and direct aid to state and local governments would likely detract from economic growth.
2. In fact, negative effects are emerging from a lack of new fiscal stimulus. In particular, August retail sales were weaker than expected and weekly unemployment claims stalled at elevated levels. These are the first readings since the $600-per-month federal unemployment benefits expired, and we could see further drags on demand.
3. Manufacturing, in contrast, continues to recover. The latest data on this front was the Empire Manufacturing Index, which rebounded to 17.0% in September from 3.7% in August, with strength across all components.
4. This difference between the manufacturing and consumer sectors could persist. Social distancing measures have much less downside effect on manufacturing, and that area of the economy is benefitting from key tailwinds, including China’s stimulus-driven recovery, pent-up demand, depressed inventory levels and improving capital expenditures.
5. Investors appear to be pricing in a higher likelihood of a coronavirus vaccine than may be likely. Even if a successful vaccine is developed before the end of 2020, it will take many months before it would be widely available. This could present downside economic and market risks.
6. The corporate earnings outlook could be brightening. Unprecedented monetary support and U.S. dollar weakness has caused many corporate management teams to raise their forward guidance.