Stock Market Sees Longest Losing Streak In Almost a Year

Euphoria in domestic equity markets unwinds

Upside euphoria continues to unwind in domestic equity markets with mega-cap tech leading the S&P 500 lower for the third straight week, its longest losing streak in almost a year. Once again, international shares fared better, with emerging markets up 1.6% (MXEF) and international developed up 0.8% (MXEA) last week, handily beating the 0.6% loss in the S&P 500 [Figure 1].   

The internals of the price action in the U.S. were choppy, indicative of a low liquidity environment, but the bid to the beaten down large-cap value segment was evident once again.  Value beat growth by about 190 basis points (bps) last week, and the year-to-date (YTD) winner — the incredibly concentrated Nasdaq 100 — notched another poor week [Figure 1].

Small caps rally strongly but new trend unlikely

In contrast to the prior two weeks, small caps (RTY) rallied strongly, handily outpacing large-caps (SPX) [Figure 1]. We saw unwinds of speculative option action in tech going through again last week, and with volatility declining despite lower equities, we continue to think that this price action is a healthy correction to extended positioning rather than the start of a new trend.

Continued economic strength despite uptick in Covid cases

The economy continues to show strength despite an uptick in Covid-19 cases — and despite less support for the unemployed from Washington. Last week, retail sales for August showed an increase, albeit a lower-than-expected one, and the University of Michigan Consumer Confidence Index exceeded expectations, printing its highest reading since March [Figure 2]. To us this speaks to the relatively strong position consumers were in before the economy shut down and augurs well for an eventual restart, whenever that occurs.

Election implications of Justice Ruth Bader Ginsburg’s death

The passing of Supreme Court Justice Ruth Bader Ginsburg last Friday evening shakes up the upcoming presidential election and is likely to completely rule out any additional compromise in Washington, D.C. ahead of November 3rd.

Supreme Court appointments are an issue that tends to rank higher, in terms of importance, with Republicans than Democrats, so this development is likely to be a boost to Trump’s reelection chances. However, fundraising by Biden was very strong in the weekend following her death, so it could be a motivator on the Democratic side. Because 2020 continues to surprise, we wouldn’t rule anything out. We’ll be watching this, and especially Senate Majority Leader Mitch McConnell, closely in the coming weeks. After all, Sen. McConnell is in charge and it will come down to whether he wants to pursue Senate confirmation of a new Supreme Court Justice ahead of the November election. For McConnell and the GOP, there are pros and cons on each side of the decision.

Central bank decisions and impact on fixed income

Yields rose slightly last week in muted trading, despite a slew of central bank decisions. The curve steepened on the week, led higher by the long end. The U.S. 2-Year, 10-Year, and 30-Year Treasury were up 1 bps, 3 bps, and 4 bps, respectively. With investors hungry for extra yield, credit continues to trade well. Investment-grade (IG) spreads fell 3 bps, while high-yield (HY) fell 6.

Fed meeting uneventful, remains relentlessly dovish

The Federal Reserve’s meeting, which ended last Wednesday, was a relatively uneventful one in terms of policy actions, though they did clarify their new forward guidance. Some blamed last week’s sell-off in equities on a lack of fresh stimulus from the Fed (equities sold off during Wednesday’s press conference and continued to fall on Thursday and Friday). We don’t agree with this take. The Fed’s approach to markets has evolved dramatically to the dovish side. Rates are not moving higher for years, and the Fed put is stronger than ever.

Global central banks also inching toward easing

Globally, other central banks are also marching more dovishly. Last week the Bank of England announced that it is studying negative rates — other G10 central banks are looking into them as well. As the impact of the new reaction function at the Fed starts to sink in, it will pressure the dollar and force other central banks to implement additional easing as well. The pull to lower rates is global, not just U.S.- based.

USD sold off, yuan at pre-trade negotiations strength

The U.S. dollar sold off last week (BBDXY -0.5%) [Figure 3], led lower by strength in Asian currencies. China continues to move their currency higher against the U.S. dollar, a sign of their continued strong rebound from Covid. But the currency is highly political as well, so it’s notable that the yuan is at its strongest level since before trade negotiations blew up in early May of last year. China is not looking to pick a fight with the Trump administration on trade at the moment, but in the age of Twitter diplomacy, things can change quickly.