Weekly Recap: COVID-19 Market Edition

Ryan NaumanMarket Strategistryan.nauman@informa.com

For the week ending September 25, 2020

2

Equities (S&P 500 index) fell for a fourth straight week, falling -0.61%, as volatility picked up due an increase in coronavirus cases, the continued stalemate around additional fiscal stimulus, and looming Presidential election.

Record low mortgage rates helped boost demand for existing homes. Sales of existing homes increased 2.4% to a seasonally-adjusted, annual rate of 6 million in August, according to the National Association of Realtors. The pace of sales is the fastest since December 2006 and are up 10.6% from a year ago. Furthermore, the median existing-home price increased to $310,600 in August, which marks a 11.4% jump from a year ago. Sales of new homes experienced a similar spike in August as sales happened at a seasonally-adjusted, annual rate of 1.011 million, which marks the first-time new home sales eclipsed 1 million since 2006.

The stellar equity rally from March lows has come to a halt, as the S&P 500 has fallen for four straight weeks and is off 6.37% since reaching its record high on September 2. Meanwhile, the CBOE Volatility index (VIX) has increased during this four week stretch. The slowing of market momentum has people wondering if the end of the stellar rally is here or are, we experiencing another “healthy” bull correction.

The uptick in volatility has been driven by a resurgence in coronavirus cases in Israel, the U.K., Europe, and here in the U.S. as investors fear we could see a second wave of cases. Additionally, there is a very important election happening on November 3rd, which is sure to be very contentious and market volatility may pick up as we inch closer to the big day. However, there is much more to the story.

One of the primary catalysts for the 6-month rally was the CARES Act and the juiced-up unemployment benefits, which ended at the end of July. Furthermore, there has been a stalemate in congress over getting the next fiscal relief package passed. Additionally, the Federal Reserve (Fed) acted quickly and strongly at the onset of the crisis by adding liquidity to markets by lowering rates to near zero and buying assets at a record pace, which caused their balance sheet to spike. However, the growth of the Fed’s balance sheet has since stalled. The slowing of monetary and fiscal stimulus packages has resulted in the slowing of supply of money (M2). The initial relief packages provided a huge boost to M2, as year-over-year M2 growth increased over 23% in August, which marked a record high, which also inflated asset prices following March lows. The cut back of stimulus packages is a risk and we are seeing it play out in markets now.

The steep market rally has also resulted in an increase in speculative trading. Trading volume in equity options has spiked to 2011 levels, while the equity put/call ratio (0.50) hasn't been this low since 2000. This large volume of calls has forced market makers who are taking the opposite side of the contract to buy the underlying stock as a hedge, which has boosted share prices. On the flip side, non-commercials, who are large speculators and are considered the “smart money” are bearish, in fact, these trader’s net short positions in Nasdaq 100 options and futures have spiked to 2006 levels .

Another dynamic that has plagued markets is that it is top heavy. The five largest stocks by market cap (AAPL, AMZN, GOOG, FB, MSFT) make up nearly 25% of the entire S&P 500 index. This hasn’t been an issue during the 6-month rally as the five highflyers have carried the index this year. In fact, the five top stocks together have returned over 28% YTD, meanwhile, the combination of the remaining 495 stocks are negative. This dynamic has benefited markets, however, the recent market volatility and sell-off could have a much wider impact. Since September 2nd, investors have rotated out of the information technology, consumer discretionary, and communications services sectors, which house the five highflyers, and into the more traditional cyclical sectors like materials and industrials, which have outperformed during these four weeks. This rotation will help broaden the market rally, which will make the market more stable. However, any economic weakness that puts the recovery on edge will increase broader based selling as investors will sell the economically sensitive cyclical sectors. If investors become uneasy about the lofty valuations of these five stocks and begin to sell them, it could have big effects on the entire market, especially if the economy softens and the beaten-up cyclical/value stocks do not take the baton from the highflyers.

From 30,000 feet the rotation from the tech, consumer discretionary, and communication services sector into cyclical sectors could be consider a healthy rotation. However, due to the waning policy support, resurging pandemic, election, and growing speculative trades, volatility will continue and any signs of growing cracks in the economy could lead to steep market wide sell-off.

Commentary

3

Sources: Zephyr StyleADVISOR, Macrobond, PSN Enterprise, Bloomberg. 1-week data as of 9/25/20, 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) 9/17/20 –9/23/20, 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 -0.61% 15.48% 9.74% 21.94% 14.52% ($7,514)

Russell 3000 -0.80% 15.93% 9.39% 21.44% 13.95% ($25,774)

Russell 1000 -0.61% 16.14% 10.43% 22.50% 14.58% ($11,628)

Russell MidCap -1.48% 11.57% -0.41% 8.73% 8.83% ($4,316)

Russell 2000 -4.01% 12.40% -5.53% 6.02% 5.03% (6,780)

MSCI EAFE -4.21% 11.33% -4.28% 6.60% 2.84% ($98)

MSCI EM -4.42% 19.71% 0.68% 14.88% 3.21% $49

MSCI World -1.72% 14.87% 5.73% 17.41% 10.42% ($22,815)

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 -0.09% 1.31% 6.85% 6.47% 5.09% 1.19

Bloomberg Barclays US High Yield -1.53% 6.72% 1.67% 4.71% 4.88% 6.27Bloomberg Barclays Municipals 10 Yr 0.00% 1.88% 3.73% 3.53% 4.23% 1.13

Major Equity Asset Class Performance Equity Style Performance Equity Factor Performance

9/25/20 9/18/20 6/30/20 12/31/19 9/25/19 9/25/172-yr U.S. Treasuries 0.12 0.14 0.16 1.58 1.68 1.4410-yr U.S. Treasuries 0.66 0.70 0.66 1.92 1.73 2.2230-yr U.S. Treasuries 1.40 1.45 1.41 2.39 2.18 2.7610-yr German -0.53 -0.51 -0.50 -0.19 -0.63 0.4210-yr Japan 0.01 0.01 0.03 -0.03 -0.26 0.0110-yr U.K. 0.19 0.18 0.21 0.74 0.46 1.34

Major Fixed Income Asset Class Performance

Rates

Chart of the Week: Volatility Has ReturnedZephyr StyleADVISOR Zephyr Associates

Daily Return / TimeThursday, January 2, 2020 - Friday, September 25, 2020 ( Shown Daily )

Dai

ly R

etur

n

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Time

Jan 02, 2020 Feb 11, 2020 Mar 20, 2020 Apr 29, 2020 Jun 08, 2020 Jul 16, 2020 Sep 25, 2020

CBOE Daily Volatility

COVID-19 Dashboard: The # Of Coronavirus Cases In The U.S. Rises Above 7 Million

Source: Macrobond, World Health Organization 4

Source: Macrobond, Centers for Disease Control & Prevention 5

COVID-19 Dashboard: New Cases Have Started To Climb Again After Slowing

6

Markets: Sharp Changes In The CBOE VIX Index Has Returned

Zephyr StyleADVISOR Zephyr Associates

Daily Return / TimeThursday, January 2, 2020 - Friday, September 25, 2020 ( Shown Daily )

Dai

ly R

etur

n

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Time

Jan 02, 2020 Feb 11, 2020 Mar 20, 2020 Apr 29, 2020 Jun 08, 2020 Jul 16, 2020 Sep 25, 2020

CBOE Daily Volatility

7

Markets: After Reaching An All Time High On Sept. 2, The S&P 500 Has Fallen Over 6%

Zephyr StyleADVISOR Zephyr Associates

Thursday, January 2, 2020 - Friday, September 25, 2020 (Single Computation)

60

70

80

90

100

110

120

Jan 01, 2020 Feb 05, 2020 Mar 11, 2020 Apr 15, 2020 May 19, 2020 Jun 23, 2020 Jul 28, 2020 Sep 25, 2020

S&P 500

8

Markets: The Tech Sector Remains In A Correction

Zephyr StyleADVISOR Zephyr AssociatesTuesday, December 31, 2019 - Friday, September 25, 2020

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

Dec 30, 2019 Feb 07, 2020 Mar 18, 2020 Apr 27, 2020 Jun 04, 2020 Jul 14, 2020 Aug 20, 2020 Sep 25, 2020

S&P 500 Information Technology (Sector) S&P 500Thursday, January 2, 2020 - Friday, September 25, 2020: Summary Statistics

S&P 500 Information Technology (Sector)

S&P 500

MaxDrawdown

MaxDrawdownBegin Date

MaxDrawdownEnd Date

MaxDrawdown

Length

Max Drawdown

Recovery Date

PainIndex

PainRatio

Gainto LossRatio

High WaterMark Date

To HighWater Mark

-31.15% Feb 20, 2020 Mar 23, 2020 23 Jun 9, 2020 6.81% 3.67 0.77 Sep 2, 2020 11.32%

-33.79% Feb 20, 2020 Mar 23, 2020 23 Aug 10, 2020 8.43% 0.34 0.77 Sep 2, 2020 8.45%

9

Markets: Since March 23, 4 Sectors Have Returned +50%, 2 Have Returned +60%, & Consumer Discretionary Has Returned +65%

Zephyr StyleADVISOR Zephyr Associates

Monday, March 23, 2020 - Friday, September 25, 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 Information Technology (Sector)S&P 500 Materials (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 Consumer Staples (Sector)S&P 500 Financials (Sector)S&P 500 Utilities (Sector)S&P 500 Energy (Sector)S&P 500

10

Markets: Since September 2 Utilities Is The Only Sector In The Black

Zephyr StyleADVISOR Zephyr Associates

Wednesday, September 2, 2020 - Friday, September 25, 2020 (not annualized if less than 1 year)

Ret

urn

-14

-12

-10

-8

-6

-4

-2

0

2

AnalysisPeriod

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

11

Markets: Chinese Equities Are +13% YTD While S&P 500 is +3.5%

Zephyr StyleADVISOR Zephyr Associates

Thursday, January 2, 2020 - Friday, September 25, 2020 (not annualized if less than 1 year)

Return

-40 -30 -20 -10 0 10 20

YTD

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

12

Markets: High Yield Bonds Have Posted A 22% Return Since March 23

Zephyr StyleADVISOR Zephyr Associates

Monday, March 23, 2020 - Friday, September 25, 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, CBOE 13

Markets: Option Volume Has Increased While The Put/Call Ratio Plummets In a Bullish Sign

Source: Macrobond, NASDAQ OMX, CFTC 14

Markets: Speculators, i.e. Hedge Funds, Have Increased Their Net Short Positions In NASDAQ Futures To ‘06 Levels

Source: Macrobond, Federal Reserve, S&P Dow Jones Indices 15

Economy: The Waning Growth Of M2 Has Boosted Equity Volatility

Source: Macrobond, BEA 16

Economy: The % Of Personal Income Made Up Of Unemployment Insurance Is Sure To Fall

Source: Macrobond, Federal Reserve 17

Fiscal Policy: The Growth Of Fed’s Balance Sheet Has Tapered Off, Resulting In Waning M2 Supply

Source: Macrobond, National Association of Realtors, U.S. Census Bureau 18

Economy: New & Existing Home Sales Spike Due To Historically Low Mortgage rates

19

All Eyes On……..

Day Event/Earnings

Monday, September 28

None Scheduled

Tuesday, September 29

U.S. Consumer Confidence Index (September), Case-Shiller Home Price Index (July)

Wednesday, September 30

U.S. ADP Employment Report (September), Q2 GDP Revision, Chicago PMI (September)

Thursday, October 1

U.S. Initial Jobless Claims (September 26), Personal Income (August), Consumer Spending (August), Core Inflation (August), Markit Manufacturing Index (September), ISM Manufacturing Index (September)

Friday, October 2

U.S. Jobs Report (September), Consumer Sentiment Index (September)

We are going to find out a lot about the health of the consumer during the upcoming week as we get personal income and consumer spending reports for the month of August. It is important to note that these readings will be the first readings that do not include the juiced-up unemployment benefits that were part of the CAREs Act which ended in July. Personal income will likely fall due to the removal of the additional $600 per week of unemployment insurance benefits. However, businesses have reopened which may offset the removal of the benefits. Additionally, we will get the September jobs report which I will be watching closely, particularly the number of permanent job losses.

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.

20

For more insights from Ryan:Subscribe to his Weekly Recap here.