Weekly Recap: COVID-19 Market Edition

Ryan NaumanMarket Strategistryan.nauman@informa.com

For the week ending September 11, 2020

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Equities, led by tech stocks falling into a correction, fell during the week as the S&P 500 index finished the week -2.49%. Markets have been erratic recently due to the lofty valuations, uncertainty around the election and additional fiscal stimulus, and slowing momentum on the labor front. These hurdles make it difficult to trade this market. On the flip side, the Federal Reserve has made their intentions of easy monetary policy clear, forecasted earnings revisions are trending upward, economic data has been showing promise, and the fear of missing out on the next steep rally have provided investors with reasons to keep buying.

It has been clear that the market is not the economy, particularly during the early stages of the dramatic equity rally, in large part due to the uniqueness of this recession. However, I believe the health and sustainability of the market rally will depend more heavily on the economic rebound. It has been well documented that the strong market performance this year has been driven by the big tech names, which works for the short-term rally. However, for the rally to be sustained long-term the breadth of the rally must widen. A solid economic recovery will benefit the cheaper sectors and cyclicals, such as travel and leisure companies, who have been beaten up during the pandemic. You may see the technology names that have benefited from the “stay-at-home” trade sell off some, which will help reduce current valuations that are unsustainable. The pandemic has forced consumers to rely more heavily on technology, which may wane as the economy strengthens. That said, I do not believe you will see a major pullback or the technology bubble burst. I still believe technology will continue to be a growing factor in the everyday lives of consumers.

The economy has staged a strong comeback after hitting bottom in April. However, there is a troubling trend that may signal rough seas ahead. During the past six months economic data has continued to defy expectations, as evidenced by the historic spike in the Citi Economic Surprise index. The better-than-expected data has a lot to do with the extreme pessimism that gripped societies during the height of the pandemic lockdowns, as it didn’t take much to beat the rock bottom forecasts. Consumer spending has increased three consecutive months after experiencing a record fall in April. Meanwhile, retail sales have experienced a v-shaped recovery and are back at pre-pandemic levels. Additionally, the housing market has been red hot as historically low mortgage rates have boosted existing and new home sales to record levels. Adding to the optimism that the economy is on a road to recovery has been the rebound in manufacturing and services activity as measured by the PMIs, which signal expansion for those industries. Equally impressive has been the increase in industrial production.

With that, the most noteworthy rebound has occurred in the labor market, or so it seems. After losing 20 million jobs and having the unemployment rate spike to 14.7%, which both marked record levels, the labor market has battled back. The unemployment rate has fallen to 8.4%, while the economy has added over 10.5 million jobs, and jobless claims have decreased since the eye-popping numbers in April. Sounds promising right? Not so fast. Underneath all this promising labor market data is a troubling tend that could slow the economy from reaching above pre-pandemic levels – permanent job losses. Most of the 10.5 million job gains since April, have come in the form of temporarily laid off employees coming back to work as pandemic caused lockdowns have eased. Meanwhile, the number of permanent job losses has increased by over 1.6 million since April as numerous companies shutter their doors for good and other corporations downsize due to the uncertainty that lies ahead. Another sign that there are some cracks in the labor market has been the amount of people applying for initial jobless claims which remain at 884,000, which is well above pre-pandemic record of 695,000. I think it is very important to keep an eye on the number of permanent job losses moving forward, if they continue to climb higher, it will dampen the speed of the economic recovery.

Moving forward I believe it is time to remain cautious and be ready to pounce on opportunities when they present themselves, such as the tech bull correction that just took place. We will see more of these healthy consolidations moving forward and will provide opportunities for investors to put money to work. Due to the uncertainty lead by the pandemic, upcoming election, and worrisome labor market data, using a dollar cost average strategy during market downturns can be a prudent strategy to gain exposure to trusted names and sectors that have become pricy during the rally.

Commentary

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Sources: Zephyr StyleADVISOR, Macrobond, PSN Enterprise, Bloomberg. 1-week data as of 9/11/20, unless otherwise stated, time periods over 1 week as of 8/31/20. Equity Style Performance represented by: Large Value – Russell 1000 Value, Large Blend – Russell 1000, Large Growth – Russell 1000 Growth, Mid Value – Russell MidCap Value, Mid Blend – Russell MidCap, Mid Growth –Russell MidCap Growth, Small Value – Russell 2000 Value, Small Blend – Russell 2000, Small Growth – Russell 2000 Growth. Fund flow data (EPFR Global) 9/3/20 –9/9/20, S&P 500 (Large Cap Blend flows), Russell 3000 (all U.S. equity flows), Russell 1000 (all Large Cap flows), Russell Mid Cap (all Mid Cap flows), Russell 2000 (all Small Cap flows), MSCI EAFE (Western Europe DM, Asia Pacific DM flows) MSCI EM (All Emerging Market flows), MSCI World (All Developed Markets flows)

Global Asset Class Performance

Index 1 Week 3-Mos YTD 1 Year 3 Year Flows (mil)S&P 500 -2.49% 15.48% 9.74% 21.94% 14.52% $4,487

Russell 3000 -2.53% 15.93% 9.39% 21.44% 13.95% ($3,1154)

Russell 1000 -2.53% 16.14% 10.43% 22.50% 14.58% $769

Russell MidCap -1.98% 11.57% -0.41% 8.73% 8.83% ($873)

Russell 2000 -2.45% 12.40% -5.53% 6.02% 5.03% ($798)

MSCI EAFE 1.45% 11.33% -4.28% 6.60% 2.84% $349

MSCI EM -0.67% 19.71% 0.68% 14.88% 3.21% $3,349

MSCI World -1.29% 14.87% 5.73% 17.41% 10.42% $121

1 Mos Value Blend GrowthLarge 4.13% 7.34% 10.32%

Mid 3.96% 3.52% 2.72%

Small 5.39% 5.63% 5.87%

YTD Value Blend Growth

Large -9.35% 10.43% 30.47%

Mid -10.82% -0.41% 15.54%

Small -17.71% -5.53% 6.15%

Factor Index 3 Mos YTD 1 YR Risk-Adj %

MSCI USA Small Cap 12.24% -5.03% 5.07%

MSCI USA Value 7.12% -9.50% 0.76%MSCI USA Minimum Volatility 6.37% 0.53% 4.75%

MSCI USA Momentum 22.28% 23.26% 28.99%

MSCI USA Quality 14.37% 15.05% 34.25%

MSCI USA Dividend Tilt 9.82% 0.16% 12.15%

Index 1 Week 3-Mos YTD 1 Year 3 Year YieldBloomberg Barclays US Aggregate 0.25% 1.31% 6.85% 6.47% 5.09% 1.15

Bloomberg Barclays US High Yield -0.22% 6.72% 1.67% 4.71% 4.88% 5.96Bloomberg Barclays Municipals 10 Yr 0.05% 1.88% 3.73% 3.53% 4.23% 1.15

Major Equity Asset Class Performance Equity Style Performance Equity Factor Performance

9/11/20 9/4/20 6/30/20 12/31/19 9/11/19 9/11/172-yr U.S. Treasuries 0.13 0.14 0.16 1.58 1.68 1.3210-yr U.S. Treasuries 0.67 0.72 0.66 1.92 1.75 2.1430-yr U.S. Treasuries 1.42 1.46 1.41 2.39 2.22 2.7510-yr German -0.48 -0.49 -0.50 -0.19 -0.55 0.3310-yr Japan 0.02 0.04 0.03 -0.03 -0.21 -0.0210-yr U.K. 0.18 0.25 0.21 0.74 0.57 1.04

Major Fixed Income Asset Class Performance

Rates

Chart of the Week: Tech Sector Falls Into Correction TerritoryZephyr StyleADVISOR Zephyr AssociatesTuesday, December 31, 2019 - Friday, September 11, 2020

-30%

-25%

-20%

-15%

-10%

-5%

0%

Dec 30, 2019 Feb 05, 2020 Mar 12, 2020 Apr 17, 2020 May 22, 2020 Jun 29, 2020 Aug 04, 2020 Sep 11, 2020

S&P 500 Information Technology (Sector)

Thursday, January 2, 2020 - Friday, September 11, 2020: Summary Statistics

S&P 500 Information Technology (Sector)

MaxDrawdown

MaxDrawdownBegin Date

MaxDrawdownEnd Date

MaxDrawdown

Length

Max Drawdown

Recovery DatePainIndex

PainRatio

Gainto LossRatio

High WaterMark Date

To HighWater Mark

-31.15% Feb 20, 2020 Mar 23, 2020 23 Jun 9, 2020 6.59% 3.58 0.77 Sep 2, 2020 12.53%

COVID-19 Dashboard: The # Of Coronavirus Cases In The U.S. Rises Above 6 Million

Source: Macrobond, World Health Organization 4

Source: Macrobond, Centers for Disease Control & Prevention 5

COVID-19 Dashboard: After Experiencing A Steep Spike In July, Cases Have Slowed

6Source: Macrobond, World Health Organization, Citi

COVID-19 Dashboard: Citi Macro Risk Index Has Fallen As COVID-19 Cases Have Declined

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Markets: Technology Sector Falls Into Correction Territory

Zephyr StyleADVISOR Zephyr AssociatesTuesday, December 31, 2019 - Friday, September 11, 2020

-30%

-25%

-20%

-15%

-10%

-5%

0%

Dec 30, 2019 Feb 05, 2020 Mar 12, 2020 Apr 17, 2020 May 22, 2020 Jun 29, 2020 Aug 04, 2020 Sep 11, 2020

S&P 500 Information Technology (Sector)

Thursday, January 2, 2020 - Friday, September 11, 2020: Summary Statistics

S&P 500 Information Technology (Sector)

MaxDrawdown

MaxDrawdownBegin Date

MaxDrawdownEnd Date

MaxDrawdown

Length

Max Drawdown

Recovery DatePainIndex

PainRatio

Gainto LossRatio

High WaterMark Date

To HighWater Mark

-31.15% Feb 20, 2020 Mar 23, 2020 23 Jun 9, 2020 6.59% 3.58 0.77 Sep 2, 2020 12.53%

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Markets: Despite The Sell-Off, Technology Stocks Remain +24% YTD

Zephyr StyleADVISOR Zephyr Associates

Thursday, January 2, 2020 - Friday, September 11, 2020 (not annualized if less than 1 year)

Ret

urn

-50

-40

-30

-20

-10

0

10

20

30

AnalysisPeriod

S&P 500 Information Technology (Sector)S&P 500 Consumer Discretionary (Sector)S&P 500 Communication Services (Sector)S&P 500 Materials (Sector)S&P 500 Consumer Staples (Sector)S&P 500 Health Care (Sector)S&P 500 Industrials (Sector)S&P 500 Real Estate (Sector)S&P 500 Utilities (Sector)S&P 500 Financials (Sector)S&P 500 Energy (Sector)S&P 500

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Markets: Since March 23, 4 Sectors Have Returned +50%, 2 Have Returned +60%, & Tech Has Returned +69%

Zephyr StyleADVISOR Zephyr Associates

Monday, March 23, 2020 - Friday, September 11, 2020 (not annualized if less than 1 year)

Ret

urn

0

10

20

30

40

50

60

70

AnalysisPeriod

S&P 500 Consumer Discretionary (Sector)S&P 500 Materials (Sector)S&P 500 Information Technology (Sector)S&P 500 Industrials (Sector)S&P 500 Communication Services (Sector)S&P 500 Health Care (Sector)S&P 500 Real Estate (Sector)S&P 500 Financials (Sector)S&P 500 Consumer Staples (Sector)S&P 500 Energy (Sector)S&P 500 Utilities (Sector)S&P 500

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Markets: Chinese Equities Are +15.5% YTD While S&P 500 is +4.8%

Zephyr StyleADVISOR Zephyr Associates

Thursday, January 2, 2020 - Friday, September 11, 2020 (not annualized if less than 1 year)

Return

-40 -30 -20 -10 0 10 20

YTD

MSCI ChinaMSCI SwitzerlandMSCI KoreaMSCI GermanyMSCI JapanMSCI CanadaMSCI AustraliaMSCI ItalyMSCI SpainMSCI United KingdomMSCI RussiaMSCI MexicoMSCI BrazilS&P 500

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Markets: High Yield Bonds Have Posted A 24% Return Since March 23

Zephyr StyleADVISOR Zephyr Associates

Monday, March 23, 2020 - Friday, September 11, 2020 (not annualized if less than 1 year)

Ret

urn

0

5

10

15

20

25

AnalysisPeriod

Barclays U.S. Corporate High YieldBarclays U.S. Corporate Investment GradeBarclays Municipal BondBarclays Global x US BondBarclays U.S. AggregateBarclays U.S. Treasury: 7-10 YearBarclays U.S. Treasury: 1-3 Year

Source: Macrobond, Citi 12

Economy: The Citi Surprise Index Has Spiked On Better-Than-Expected Economic Data

Source: Macrobond, U.S. Department of Labor 13

Economy: Despite Falling, The Pace Of Declining Initial Jobless Claims Has Slowed

Source: Macrobond, BLS 14

Economy: Increasing Permanent Job Losses Point To A Troubling Trend

Source: Macrobond, BEA 15

Economy: Consumer Spending Continues To Rebound, However, The Pace Has Slowed

Source: Macrobond, IHS Markit, ISM 16

Economy: PMI’s Have Recovered And Signal Expansion

Source: Macrobond, IHS Markit, ISM 17

Economy: PMI’s Have Recovered And Signal Expansion

Source: Macrobond, U.S. Census Bureau 18

Economy: Retail Sales Are Above Pandemic Levels

Source: Macrobond, S&P Dow Jones Indices, National Association of Realtors (NAR) 19

Economy: Despite The Historically Deep Recession, The Housing Market Has Surged

Source: Macrobond, Federal Reserve 20

Economy: Industrial Production Has Bounced But Remains Well Below Historic High Achieved In 2018

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All Eyes On……..

Day Event/Earnings

Monday, September 14

Non-Scheduled

Tuesday, September 15

U.S. Empire State Index (September), Industrial Production Index (August), Median Household Income (2019)

Wednesday, September 16

U.S. Retail Sales, (August), NAHB Homebuilders’ Index (September), Federal Reserve Meeting Announcement

Thursday, September 17

U.S. Initial Jobless Claims, (September 12), Housing Starts (August), Building Permits (August), Philly Fed Manufacturing Index (September)

Friday, September 18

U.S. Current Account Deficit (Q2), University of Michigan Consumer Sentiment Index (September)

The week ahead will be highlighted by the Federal Reserve (Fed) meeting announcement and Chairman Powell’s follow-up press conference. It is well documented that the Fed plans on keeping interest rates low for the foreseeable future as the central bank has laid their monetary policy on the table so there shouldn’t be much anticipation in terms of their rate policy. However, many may want to listen to their economic forecasts and expectations moving forward.

As for economic data, the week contains multiple releases from the red-hot housing market. Additionally, retail sales for the month of August will be released which will be widely watched as the pace of sales slowed in July. Finally, consumer sentiment will be updated, which is an important indicator for consumer spending and the potential health of the economy.

About Ryan Nauman

As Market Strategist, Ryan Nauman’s primary focus is providing value added market and investment insight along with educating buy-side participants on investment analytics and portfolio management concepts.

Ryan provides analysis and research on market trends across asset classes, sectors, and regions to help empower better decisions for creating asset allocation strategies. His insight is disseminated through white papers, articles, training, and interviews with a target audience of financial advisors, portfolio managers, and investment analysts.

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