(This report was released on Sept 27. All data herein is from that date or prior.)
Large caps are now in correction territory, having fallen 10% from the recent peak of Sept. 2. The correction started with some high-flying tech stocks falling back. We have gone through the dynamics of what drove those stocks up – and back down in prior writings. The one bright spot was Nike (NYSE:NKE) which reported a sharp rebound in sales this summer.
Then we have the uptick in COVID-19 cases, especially in Europe. Here’s the First Trust COVID Tracker which has a ton of updated information on the virus. This increase in Europe – with the potential for more lockdowns and contracting economic activity – is weighing on markets.
Lastly, the death of Supreme Court Justice Ginsburg has thrown a monkey wrench into the stimulus talks. The prospects of a new deal were slim on Monday and Tuesday but perked up late in the week as details emerged of discussions between Nancy Pelosi and Treasury Secretary Steven Mnuchin. A new $2.4T deal emerged which is likely a starting point of new negotiations. The major indices rallied on the news on Friday.
Equities continue to experience their deepest correction since bottoming in March, but focusing only on stock market declines misses the equally-important erosion in cross-asset correlations that has emerged this month. Few of the safe assets are moving in the expected direction: USD is up 2% versus EM FX and 10Y German yields are down 10bp, but US 10Y & 30Y yields, USD/JPY and EUR/CHF are almost unchanged. Gold is off 6%. So a typical basket of defensives is functioning about as well as fire insurance that covers just one bedroom in the house. This risk-management problem