The stock market rally took a breather this week, with some of the biggest technology names facing selloffs in their shares, dragging equity benchmarks with them. The leaders of the recovery plunged as investors came to the sudden realization that some stocks could not rise into the stratosphere indefinitely. The selloff, while sudden and swift, was not meaningfully significant in terms of size, with the S&P 500 giving back a few percentage points of an over 50% rally since the March 2020 low. Many believe this to be a technical correction, with several measures showing stocks were extremely overbought and that a pullback was imminent and necessary to maintain the health of the bull market. Encouragingly, markets held at key levels, bouncing off their 50-day moving averages, demonstrating resilience in the face of sellers.

On the economic front, data continues to be mostly positive and surprising to the upside. Job openings increased by almost 5%, producer prices rose above forecast, and sentiment among US consumers improved the most in 11 years. The jobs picture is more nuanced, with jobless claims staying elevated at around 900,000 while ongoing claims rose slightly. Additionally, more Americans are leaving their current jobs for better prospects, indicating confidence in the job market. The debate that is raging now is whether the recovery can continue without additional support from Washington. Markets largely expected a significant spending policy of between $1-2 trillion to be unveiled in the coming weeks, but that view is dimming as a consensus is looking unlikely at this point. Negotiations have stalled, and political jockeying heading into the presidential election is now casting doubt over the likelihood of additional stimulus. It remains to be seen whether investors can maintain faith in the recent run without such support for suffering small businesses and the millions who have lost their jobs to the virus.

With the recent pickup in volatility, we have added marginally to some positions which we believe have become more attractive given the declines. While the drop in equity prices was significant, markets generally remain richly priced and we are not excited about adding meaningfully to risk exposures. We expect the confluence of election uncertainty, the outstanding unknowns regarding COVID’s spread, and valuations to keep investors on edge for the coming months. While hedge funds and day traders appear more than willing to “buy the dip” in equities, we remain more cautious. The recovery is fragile, and with that understanding, we are more inclined to increase our exposure to risk higher up in the capital structure, through higher-yielding fixed income. We will be maintaining equity exposure at our traditional levels unless circumstances warrant becoming more defensive. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.