Mega-Cap Tech Sell-off Brings Back Market Volatility.
Market Recap Week ending 9/4/2020
Volatility returned to the market last week as mega-cap technology and momentum issues sold off. VIX, a measure of market volatility, increased 33.9% for the week. The index had shown some erratic trade in the prior week, perhaps signaling that market prices had become a bit overdone. Technically the market also looked a little overcooked- the S&P 500 had traded ~16% higher than its 200-day moving average. For the week, the S&P 500 lost 2.3%, the Dow shed 3.3%, the NASDAQ fell 1.8%, and the Russell declined 2.7%.
These losses could have been much larger if not for a substantial rebound on Friday. At one point on Friday, the S&P 500 was off 3.1% but closed off 0.80; the NASDAQ was off 5.1% but managed to close down 1.3%. Safe-haven assets provided minimal cover in the sell-off. The US Treasury curve was little changed with the 2-year note yield increasing by one basis point to close at 0.16%, and the 10-year bond yield losing one basis point to close at 0.72%. Gold fell $40 to close at $1934.10 am Oz. Oil tumbled, falling 7.6% or $3.27 to close at $39.70 a barrel.
We did have a couple of changes to our models last week. In the Flex series, we added exposure to the S&P 500 and reduced our position in mid-duration US Treasuries. In our Strategic series, we sold out of our exposure in convertibles held in our most conservative models and added to our enhanced cash position.
It was a pretty hectic week. In the first couple of sessions, markets continued to add to their August gains. However, the strength faded mid-week as profit-taking took hold on the mega-cap tech and momentum issues. There did not appear to be an obvious catalyst; instead, I think investors realized many stocks had perhaps moved to much to quickly given the current economic outlook. One need only look at names like Apple, Tesla, Nvidia, Salesforce, Zoom, etc.… to get the idea. It's not to say these companies cannot grow into their current prices just that many of them had been on fire and were due for a pullback.
Economic data continued to be better than expected. Initial Jobless Claims decreased to 881k versus the consensus estimate of 975k. Continuing Claims also continued to improve, coming in at 13.25 million relative to the prior week’s reading of 14.492 million. The Employment Situation report showed an increase of 1.371 million jobs, which was a bit light of the consensus estimate of 1.4 million jobs. The unemployment rate fell to 8.4% from 10.2% in July. Average Hourly Earnings were up 0.4%, which was better than expected. ISM Manufacturing and ISM services continued to indicate expansion with readings of 56 and 56.9. respectively.
