Economic and political backdrop
Last week began on a down note, with the renewed rise in coronavirus cases in Europe and several other concerns weighing on sentiment. Prospects for Democrats and Republicans to agree on an additional round of stimulus seemed to diminish further following news over the previous weekend of the death of Supreme Court Justice Ruth Bader Ginsburg and President Trump’s vow to have a replacement confirmed before the election. Allegations that major global banks had been involved in extensive money laundering operations dragged financials shares lower and seemed to be a further drag on overall sentiment. Finally, reports of stalled negotiations to avert a government shutdown concerned investors. On Wednesday, however, the Democrat-controlled House of Representatives passed a continuing resolution to replace federal funding set to expire the following week, with passage by the Republican-led Senate expected in the coming days.
The major equity indexes attempted to rally periodically as the week progressed – with volatility particularly apparent in major technology and internet-related stocks – but continued virus concerns and worries that the market had rebounded too far in the summer seemed to limit the gains. The S&P 500 had its biggest daily decline in two weeks on Wednesday, following testimony from Dr. Anthony Fauci, the nation’s leading infectious disease official, before the Senate. Fauci expressed dismay at the lack of adherence to coronavirus prevention guidelines and estimated that US cases could escalate to 100,000 per day versus a current daily level of around 40,000.
The week’s economic data generally indicated a continuing, but slowing, recovery and did not appear to play a major role in pushing the markets in either direction. Thursday brought news that weekly initial jobless claims had risen slightly, to 870,000, while continuing claims had declined much less expected, from 12.7 million to 12.6 million. The manufacturing sector appeared to remain in good shape as companies restocked inventories depleted in the wake of the pandemic, but IHS Markit’s purchasing managers’ index (PMI) of service sector activity declined for the first time since April, if only slightly (from 55.0 to 54.6, still indicating expansion). Headline durable goods orders in August missed on the downside, but core capital goods orders – which exclude defence and aircraft orders – rose a solid 1.8%, while July’s increase was revised higher, to 2.5%. Housing also remained a bright spot, with new home sales in August reaching their best level since September 2006.
The S&P 500 finished the week down 0.6% (3.8% YTD), enduring its fourth consecutive week of declines, marking the longest such stretch in over a year and sending the S&P 500 briefly into correction territory (down more than 10% from its recent peak). Consumer discretionary shares outperformed, helped by Nike reporting a rebound in summer sales. Technology stocks also proved resilient, helping the tech-heavy Nasdaq Composite record a gain of 1.1% for the week (22.9% YTD). Energy stocks suffered the biggest declines in the S&P 500 in response to falling oil and natural gas prices, while declines in regional bank stocks due to concerns over depressed lending margins put pressure on financials shares. Russell 1000 Growth gained 1.4% (21.9% YTD), while Russell 1000 Value lost 2.8% (-12.7% YTD) and Russell 2000 fell 4.0% (-10.5% YTD).
Fixed income markets
The 10-year US Treasury yield moved slightly lower for the week to 0.66%, down from 0.70%.
Economic and political uncertainty, virus concerns and equity losses contributed to risk-off sentiment and kept investment-grade corporate bond issuers on the side lines as the week began. However, two days of heavy issuance contributed to somewhat unfavourable technical conditions and brought the volume of new deals in line with weekly expectations. Credit spreads drifted wider, with riskier segments seeing the greatest impact.
Heightened caution combined with technical factors to weigh on the high yield market. September had already become the second-busiest month of 2020 for high yield new issuance, and below investment-grade funds reported negative flows. The heavily weighted energy segment underperformed as the pandemic clouded the outlook for oil demand and stoked oversupply concerns.
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